What is really risky? – Risk profiling can start some interesting discussions

What is really risky?

The hardest part of my job is to work out what makes my clients worry when it comes to investments. Over the years I have tried and tested many strategies to measure risk, as I know we all have. Currently Parsonage uses Finametrica’s questionnaire because we think it’s the best one.

I like it because it doesn’t ask technical questions; instead it asks questions about real life so people can relate to it better. Sometimes, though, it throws up some interesting discussions, such as…

..My client, who owns a successful business, answered that she would prefer a job with more job security than a job with more pay. She probably wasn’t expecting me to laugh when she gave that answer, and she didn’t really need me to remind me that if she doesn’t sell her products she doesn’t eat. She knows that. But to her, owning her own business offers more job security, because in her words “nobody can sack me”.

…I also understand that clients like (let’s call him Harvey) don’t need to chase an extra 1% a year growth. They would rather relax in the knowledge that their investments are equally unlikely to shoot out the lights as they are to plummet to new depths.

…Another client recently answered that she has never geared-up, in other words, she has never borrowed money to invest into something. I asked how she had purchased her rental property? She said she hadn’t borrowed to invest because she already had the cash even though she did borrow to replace the cash. You can imagine the discussion we had about that.

These are just a few examples and there have been many many similar exchanges between me and business owning clients over the years. There is definitely a theme. Investments feel risky because somebody else is in control. I understand that and I can relate to it.

I could interpret these apparent contradictions as a failing of the risk profiling system. I don’t. I think that any risk profiling result that provokes that kind of a discussion between me and my clients can only be useful.

I’ve shared these vignettes because I’m fascinated by the way people make their financial decisions.

I am also interested to hear your perspective, what would be your answer to those three questions? If you’d like to take the Finametrica Risk Profiling test yourself without paying their retail fee, drop me a line with your name and email address.