rkhusky wrote:This looks to me like the potential numbers for approximately 20/80, 50/50 and 80/20 portfolios. Perhaps Vanguard used real portfolios to come up with the numbers, rather than some model distribution.
Yes, that's also the only explanation I could ever think of for how this question could have come about. But it yields a question where, for a wide range of interpretations to fill in the missing information (of which I just gave one interpretation as an example), option B has lower risk and higher expected return than option C. That's actually quite astonishing when you'd expect a generic survey like this should unambiguously portray a tradeoff between risk and return.
nisiprius wrote:I haven't seen a risk tolerance survey that wasn't deeply flawed. ...
I've slowly come to the cynical conclusion that none of these surveys is seriously intended to measure risk tolerance for your own benefit, but are just there to keep advisors out of trouble by putting you on the record as accepting a moderate degree of risk so you can't say they recommended unsuitable investments. ...
Right, but the question I mentioned provides a gratuitous additional flaw, over and above some of the unavoidable flaws.
And it's true that these surveys are somewhat to cover the advisors (though I believe Vanguard is genuinely trying to have a helpful website) (and I also believe honest advisors shouldn't blamed for things out of their control, such as market volatility) but they could definitely improve the survey to serve the purpose they want.
Also think about what wishes an investor may be expressing by choosing option C (more risk, less return) instead of option B. They could be saying they want to split between stocks and casino table games. Or they could be saying they want to stay invested in a highly leveraged (or inverse) stock ETF while it inevitably compounds towards zero. An advisor could carry out these self-destructive wishes in accordance with the survey results.
There's another flawed question in the Vanguard survey that asks if you would sell your bonds if they dropped 4%. They fail to distinguish between the Nervous Nellies who are bailing out at a loss, and the aggressive risk-taking investors who are selling the bonds to load up on more of the stocks that have dropped 50%.
bottlecap wrote:I disagree with your assumption that the chances are equally likely. The question asks about risk v. reward, I don't know how you can make that assumption. Nothing in the question asked about what kind of average return you want.
You have the logic exactly backwards. Pointing out the flaw in Vanguard's survey question doesn't rely on any specific assumption or interpretation. Instead, the mere existence of one (indeed many) reasonable interpretations that make option C have more risk and less return than option B, means that Vanguard's survey question has failed to unambiguously exclude that type of comparison, and that's a serious problem.
bottlecap wrote:You also have too much time on your hands!
It only took me a couple of seconds to recognize the flaw in the question.