Money Australia – July 2017

INVESTING RISK TOLERANCE

financial

personality

W

e all know investing is
meant to be a rational
process. So to what extent
can being aware of our
biases and personality
traitsmakeusabetteratit?Financialplan-
ners are increasingly turning to behavioural
science and risk-profiling tools. Their aim is
to identify your underlying motivations and
helpyoubecomeamoreobjective,rationaland
engaged investor. Risk-profiling tools range
widely from sophisticated psychometric tests
usedbyhigh-endfinancialadviserstobasic
questionnaires that combine a few risk-tol-
erance questions with your financial goals.

High or low risk
Risktoleranceisthedegreetowhichyoucan
stomach large swings in the sharemarket and
variabilityinreturns.Anaggressiveinves-
tor,oronewithahighrisktoleranceandis
willing to risk losing money for potentially

higher returns. A conservative investor with

lowrisktolerancepreferssafeinvestments

that preserve capital.

Campbell Heggen, a lecturer in financial

planning at Deakin Business School, would

liketoseemoreemphasisonthecognitive

sciences. “I’m of the view that behavioural

coachingisamajorpartofthevalueafinan-

cial adviser can add. Risk profiling helps us

identify potential negative behaviours and

work through those as a sounding board.”

For instance, being impulsive and living

in the moment can influence the ability of

people to save or stick to a budget, he says.

Others can be overly cautious. “They like to

accumulatelargebodiesofinformationand

consider all options before making a decision.

Itmightmeanyounevertakeaction,thatyou

spend too long thinking about the positives

and the negatives,” says Heggen.

Familiarity bias is another trait. “We tend

to prefer investments we are more familiar

with.TosomeextentthatexplainsAustralia’s

love of real estate. We have the family home,

we understand how the real estate market

workssowearemorecomfortablewithbricks

and mortar investing than the sharemarket.”

Identifying these traits is important because

financial planners have a legal obligation to

“know” their clients and ensure their recom-

mendations in their best interests.

Toolsthathelp

Most advisers consider risk-tolerance tools

aspartoftheprocess,ratherthanasastand-

alone solution, says Heggen: “If we look at

ariskprofiletestorhowitwouldtypically

work, the questionnaire would generally try

toidentifyanumberoftraitswhichcontribute

to an individual’s overall risk profile.

“These may vary between questionnaires

butthetwomaintraitsyoutypicallyseekto

identify are the individual’s risk tolerance

as well as their risk capacity.” He says risk

STORY

VITA PALESTRANT

What kind

of investor

are you ...

impulsive,

inclined to

follow the

herd or so

cautious

you analyse

everything

to the point

of paralysis?

Character

traits

influence

everything

we do

Uncover your