InVesting Temperament and Tolerance Shenanigans

Financial Advisors Evaluating Malarkey


By Dr. David E. Marcinko MBA


Evaluating “Sham” Risk Aversion Determination Methodologies

BACK STORY: You visit a local financial advisor as a prospective client. S/he gives you a form to complete that purports to discern your investing risk tolerance?

FORM: It says: “Please indicate by ranking the items below from 1 to 4, with 1 being the most descriptive and 4 being the least descriptive”.


EPIPHANY: After reviewing the form, you realize it is a superfluous one-size-fits-all risk reduction mechanism for the advisor. You identify the sheer malarkey of the exercise and leave in disgust. You ruminate to yourself – “there must be a better way,”


And so, colleague Rick Kahler MSFS CFP® suggests alternative methods.


Your thoughts are appreciated.




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One Response


    Risk tolerance and or appetite is calculated in many different ways. Every firm has their own questionnaire or survey to help articulate a specific number that is to help the advisor make suitable or meaningful recommendations as to what investment vehicles may be right for you.

    However, it is important to discuss downside risk as a primary focus as opposed to upside potential. I think 1 year, 5 year, 10 year best and potentially worst outcomes are a good measure of any portfolio to determine volatility.

    I have found that good expectations about volatility and possible returns on the front end help keep investors invested in their portfolios and in turn better their chances of reaching their goals. One thing that a lot investors do not seem to have a great grasp on is outperforming on the downside and how proper diversification can help you achieve that.

    For example, let’s consider that the market is down 40% in a given year and your portfolio is down 25%. Even though you lost money that is an out performance and you now need less return on the upside to recover and get back into profits.



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