Jason Zweig is one of my favorite financial writers. Especially when he tackles the subject of “investment risk tolerance.”
I was thrilled a couple of years back when he asked me to contribute to one of his Intelligent Investor columns in the Wall Street Journal.
He also has a great quote that I can identify with as I attempt to share my thoughts with you in writing each week . . .
According to Zweig, “I was once asked, at a journalism conference, how I defined my job. I said: My job is to write the exact same thing between 50 and 100 times a year in such a way that neither my editors nor my readers will ever think I am repeating myself.”
In one of his more recent articles, he takes issue with a long-standing tradition among many financial advisors:
The risk tolerance quiz.
To be fair, I’ve used risk tolerance quizzes and questionnaires in the past dating all the way back to my days at Merrill Lynch.
More recently, a few years ago I was enamored with a slick-looking software-based risk tolerance evaluation. Some of you may have seen it at the time.
Yet I always come back to my present stance. One that I apparently share with Mr. Zweig.
These things are mostly useless. (my words, not his)
They’re a better indicator of your recent experiences in the investment markets than they are of your actual tolerance and/or capacity for risk in the next hold-on-to-your-seat market drop.
More importantly, they don’t consider the entirety of your financial situation.
I believe that your willingness to take risk should be based on your financial plan. And your financial plan, if developed correctly and regularly updated, should be based on your life.
What if you’ve accumulated more money in savings and investments than you’ll ever spend?
Then I’m less concerned with your “tolerance for risk” and laser-focused on doing everything within our control to remove any unnecessary risk and uncertainty from your financial plan. And your life.
In other words, I don’t want to know how much risk you can take. Instead, let’s figure out the least amount of risk we need to take to make your plan work over time.
On the other hand, what if you have big goals, dreams, and aspirations?
Even if you’ve done a good job preparing for your financial future, your financial plan (and your life) might dictate that you take on a little more risk to give yourself sufficient confidence and comfort that you’ll be able to achieve the things that are important to you and those you care about.
Sadly, I think many advisors use a risk tolerance quiz as a poor substitute for a financial plan.
Or, they want to fast forward to getting their mitts on your portfolio so they can invest it and begin collecting fees. Financial planning, if any is done at all, might come later.
Or it might not.
Imagine going to your Doctor, but instead of a thorough examination, she simply asks you to fill out a short multiple-choice questionnaire that she’ll rely on to make a diagnosis and treatment plan.
But this is pretty much what happens between many advisors and their clients on a day-to-day basis if they rely on the quizzes to diagnose how your portfolio should be managed.
Suffice it to say, Jason Zweig is a much more gifted writer than I am. So I encourage you to read his article above and read his future Intelligent Investor installments.
And in the case of risk tolerance quizzes, I agree with his words of caution.
Ultimately, your risk tolerance should be based on the whole of your life and what you’re trying to accomplish. Not on a 10-question multiple-choice questionnaire.