Both online and in-person investment management firms require individual investors to fill out a “risk” questionnaire. Regardless of the firm, these questionnaires are surprisingly the same.
There are two main goals all investment management firms want to achieve with this exercise.
First, is the trap these questionnaires set for individual investors. Everyone wants their stock market investments to grow. That means you are a “growth” investor. When you respond with that answer on the risk questionnaire the investment management firm will never get in legal trouble. The next time you lose a lot of money in the next great stock market decline, your growth label seals your fate.
Second, these risk tolerance questionnaires attempt to measure your attitude towards risk. In my experience, you might as well ask an individual investor, “What is your attitude toward life?”
I call BS on any attempt to measure a person’s tolerance for stock market risk. And volumes of behavioral finance research come to the same conclusion. You can’t put a statistical measurement on an individual investor’s ability to sit through week after week of double-digit stock market losses.
Individual company 401(k) retirement plan participants see no risk when the stock markets are rising. They are adding their own contributions along with company-matching contributions every month. See your most recent June 2019 company 401(k) statement as a prime example.
What good is a stock market risk questionnaire results when the stock markets and company 401(k) retirement plan account balances are near all-time highs?
Every individual investor’s tolerance for risk is now changed. Go online today and compare your company 401(k) retirement plan account balance with your June statement.
Risk questionnaires give individual investors a false sense of security. These questionnaires are used to document ‘suitability.’ There is no way on earth they provide what individual stock market investment want and need; an investment management game plan to preserve stock market principal in the early stages of a stock market decline.
In the previous 17 months prior to March 2009, the S&P 500 Index lost 57%. A risk questionnaire did not provide one dollar of stock market principal preservation.
Forget the online, computer generated, pie chart, assigned-numbers provided by risk questionnaires. Ask yourself this simple question instead.
“How much of my company 401(k) retirement plan account value am I willing to risk over the next couple of years?”
I ask every new individual company 401(k) retirement plan participant I meet with the following question. “How much of your company 401(k) retirement plan account can I lose before you fire me.”
Right now, you should be considering your answer to these two questions.
Ric Lager
Lager & Company, Inc.
