Allan Roth: Why Risk-Profile Questionnaires Don’t Work

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Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by Fallible » Fri Sep 06, 2019 6:37 pm

Allan Roth, a Boglehead and fee-only registered investment advisor, explains why he doesn't use the questionnaires with his clients:
I love the idea that risk tolerance is something that can be quantified by answering certain questions that magically reveal what your asset allocation should be. I’m opposed to using them, however, because reality indicates they don’t work. For example, the Vanguard survey said I should be 80% in stocks, while other surveys I’ve taken put me as high as 90% stocks. The lowest stock allocation I received from a questionnaire I took recently came from Riskalyze at 55% stocks.

According to these questionnaires, I should be between 55% to 90% stocks. Yet I won’t budge from my current target of only 45% stocks for three reasons:
https://www.advisorperspectives.com/art ... -dont-work

Has anyone taken a risk tolerance questionnaire and later found out it was wrong - or right?
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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by willthrill81 » Fri Sep 06, 2019 7:10 pm

Whether all of the risk-profile (or risk tolerance) questions being used in these questionnaires are reliable (i.e. they yield consistent results), which Allan says that at least some are not, is a separate issue from whether they have construct validity (i.e. they are indeed measuring an individual's risk tolerance).

That being said, I don't know whether the psychometric scales being used in these questionnaires have been examined in terms of the properties expected by academic researchers (e.g. unidimensionality, discriminant validity, convergent validity, predictive validity). I would not be surprised if they have not.

Allan goes on to seemingly insinuate that risk tolerance cannot be measured in a meaningful way. I'm not sure that I agree with that.

Also, I strongly disagree with his need/willingness matrix (see below).

Image

Why should a seemingly low need to take risk completely preclude an investor from taking on an 'aggressive' AA? That seems awfully preachy to me (i.e. "You don't need to take on risk, so you should own more bonds and stop being so greedy. I know better than you do how you'll really react if/when stocks plunge."). Many of us are investing for those who will inherit our assets (the 'game' is never 'won'). And over the long-term, I for one think that a good defense to many of the risks we face in investing is a good offense (i.e. a big pile of money), and a 'conservative' AA may not be the most effective way to achieve that.

This article reminds me why I don't want to have an adviser.
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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by vineviz » Fri Sep 06, 2019 7:51 pm

willthrill81 wrote:
Fri Sep 06, 2019 7:10 pm
This article reminds me why I don't want to have an adviser.
At least not one who doesn’t know how to evaluate risk tolerance.
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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by Peter Foley » Fri Sep 06, 2019 8:01 pm

I've taken a couple surveys and provided one to MN Bogleheads at a meeting in 2009 or 2010. We took the survey and scored it. Those who had previously taken a survey were less risk tolerant by one level than the outcome of a previous survey. We were just coming out of a recession and the emotion of going through the recession made many of us a bit more cautious.

My take - as a general indicator they are okay but not very definitive. They are affected by time and place.

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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by JBTX » Fri Sep 06, 2019 8:09 pm

willthrill81 wrote:
Fri Sep 06, 2019 7:10 pm
Whether all of the risk-profile (or risk tolerance) questions being used in these questionnaires are reliable (i.e. they yield consistent results), which Allan says that at least some are not, is a separate issue from whether they have construct validity (i.e. they are indeed measuring an individual's risk tolerance).

That being said, I don't know whether the psychometric scales being used in these questionnaires have been examined in terms of the properties expected by academic researchers (e.g. unidimensionality, discriminant validity, convergent validity, predictive validity). I would not be surprised if they have not.

Allan goes on to seemingly insinuate that risk tolerance cannot be measured in a meaningful way. I'm not sure that I agree with that.

Also, I strongly disagree with his need/willingness matrix (see below).

Image

Why should a seemingly low need to take risk completely preclude an investor from taking on an 'aggressive' AA? That seems awfully preachy to me (i.e. "You don't need to take on risk, so you should own more bonds and stop being so greedy. I know better than you do how you'll really react if/when stocks plunge."). Many of us are investing for those who will inherit our assets (the 'game' is never 'won'). And over the long-term, I for one think that a good defense to many of the risks we face in investing is a good offense (i.e. a big pile of money), and a 'conservative' AA may not be the most effective way to achieve that.

This article reminds me why I don't want to have an adviser.
Interesting take. One might argue to the extent you are investing for heirs that constitutes some level of need. If you weren't concerned about leaving an estate, and you have more than enough to take care of your future wants and needs, how or why is it rational to take an aggressive allocation?

The truth is my description above of having ample money with no estate goals fits very few people.

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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by nisiprius » Fri Sep 06, 2019 8:10 pm

1) One reason why risk-profile questionnaires don't work is that all the ones I've ever seen, seem to me to be soft-pedalling the risk.

For example, stocks declined a bit farther than -50% during 2008-2009 by any measure I've ever seen. Well, having lived through it I can tell you that seeing the value of an investment cut in half is a shocker. But instead of hitting over the head with it--if I owned a stock investment that was cut in half--Vanguard chooses a time period with a -31% loss, almost as if they didn't even want to confront you with losing even a third. Yes, I do see that they are trying to get at rate as well as total decline.

Vanguard - Investor Questionnaire
From September 2008 through November 2008, stocks lost more than 31%. If I owned a stock investment that lost about 31% in 3 months, I would … (If you owned stocks or stock funds during this period, select the answer that corresponds to your actual behavior.)

[ ] Sell all of the remaining investment.
[ ] Sell a portion of the remaining investment.
[ ] Hold onto the investment and sell nothing.
[ ] Buy more of the investment.
2) Another reason why they don't work might be that they aren't intended to work. Their function might not be to assess, as honestly and accurately as possible, what your risk tolerance really is. It might be to keep the brokerage out of trouble for selling you unsuitable investments by putting you on record as being comfortable with a moderate level of risk.

3) I don't know how you could truly assess your tolerance for financial risk, but a few words on paper can't do it.
Last edited by nisiprius on Fri Sep 06, 2019 8:12 pm, edited 1 time in total.
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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by LilyFleur » Fri Sep 06, 2019 8:11 pm

In today's Intelligent Investor column in the WSJ, "Knowing if You Can Stomach the Next Big Market Swing," Jason Zweig discusses risk tolerance quizzes and research on how FAs tailor AAs in various ways, rather inconsistently, to the same risk tolerance at times. He concludes, "The best guide to whether you will dump stocks in the next financial crisis is whether you did in the last one. If you weren't investing in 2008-9, look back at the fourth quarter of 2018, when stocks lost nearly 20%. Be sure to ask what your financial adviser did in past market plunges, too."

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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by FIREchief » Fri Sep 06, 2019 8:16 pm

Good article. I've always felt that these surveys are largely worthless (for those reasons stated and others).
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by nedsaid » Fri Sep 06, 2019 8:20 pm

Wow, am I ahead of the curve or what? I remember posting that people should look at the asset allocation recommended after taking a risk survey and reducing by 10% to 15% the amount allocated to stocks. So if the survey recommends 75% stocks, an investor should have an investment portfolio of 60% to 65% stocks. The reasons I recommended this is that these surveys seem to have a bias for more aggressive portfolios. Also people always feel confident, if not overconfident, during bull markets. Until you feel the pain of actual portfolio losses, it just seems like playing with monopoly money. You don't really know your risk tolerance until you have been through a bear market.

On the other hand, it seems that you take the amount of risk dictated by need to take risk and by an investors age. You have to do things that don't feel comfortable in order to succeed. So a 22 year old might feel more comfortable in FDIC Insured Certificates of Deposit but 2% to 3% returns are not going to fund a retirement unless one can save amazing amounts of money. A 22 year old has a need to take high equity risk. As Ben Stein would say, a Doctor doesn't ask you about cast tolerance if you have broken your arm, the Doc just sets the bone and slaps on the cast. He could care less if you think it itches.

Conversely, if you are an older investor used to big returns in the stock market who also has won the game, it feels very uncomfortable to de-risk, selling stocks to buy bonds. It doesn't feel comfortable but it is probably necessary to do so.

So in many ways, I think risk tolerance is an incorrect concept. Successful investing really has more to do with going against your emotions than seeking comfort. People obsess over market volatility but then ignore the certain loss of buying power to inflation if they just sit in low yielding investments. Loss of purchasing power of the dollar over time is a much bigger risk than market volatility.

A really good investment advisor needs to tell people what they really don't want to hear. It doesn't enhance attracting clientele but an unpopular message sometimes needs to be delivered.
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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by unclescrooge » Fri Sep 06, 2019 8:21 pm

LilyFleur wrote:
Fri Sep 06, 2019 8:11 pm
In today's Intelligent Investor column in the WSJ, "Knowing if You Can Stomach the Next Big Market Swing," Jason Zweig discusses risk tolerance quizzes and research on how FAs tailor AAs in various ways, rather inconsistently, to the same risk tolerance at times. He concludes, "The best guide to whether you will dump stocks in the next financial crisis is whether you did in the last one. If you weren't investing in 2008-9, look back at the fourth quarter of 2018, when stocks lost nearly 20%. Be sure to ask what your financial adviser did in past market plunges, too."
Seems your advisors's risk tolerance is risky important!

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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by mickeyd » Fri Sep 06, 2019 8:23 pm

Many years ago (15+) I found that Vanguard risk questionnaire very helpful in arranging my initial AA search. Sure, my current AA is a lot different than that one of many years ago, but it was an excellent place to begin. We all need a boost along the way.
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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by unclescrooge » Fri Sep 06, 2019 8:26 pm

nisiprius wrote:
Fri Sep 06, 2019 8:10 pm
1) One reason why risk-profile questionnaires don't work is that all the ones I've ever seen, seem to me to be soft-pedalling the risk.

For example, stocks declined a bit farther than -50% during 2008-2009 by any measure I've ever seen. Well, having lived through it I can tell you that seeing the value of an investment cut in half is a shocker. But instead of hitting over the head with it--if I owned a stock investment that was cut in half--Vanguard chooses a time period with a -31% loss, almost as if they didn't even want to confront you with losing even a third. Yes, I do see that they are trying to get at rate as well as total decline.

Vanguard - Investor Questionnaire
From September 2008 through November 2008, stocks lost more than 31%. If I owned a stock investment that lost about 31% in 3 months, I would … (If you owned stocks or stock funds during this period, select the answer that corresponds to your actual behavior.)

[ ] Sell all of the remaining investment.
[ ] Sell a portion of the remaining investment.
[ ] Hold onto the investment and sell nothing.
[ ] Buy more of the investment.
2) Another reason why they don't work might be that they aren't intended to work. Their function might not be to assess, as honestly and accurately as possible, what your risk tolerance really is. It might be to keep the brokerage out of trouble for selling you unsuitable investments by putting you on record as being comfortable with a moderate level of risk.

3) I don't know how you could truly assess your tolerance for financial risk, but a few words on paper can't do it.
You should take a look at riskalyze.com.

It uses prospect theory to gauge maximum loss threshold and assigns a risk score. Then it uses statistical modeling to determine the risk score of your portfolio and you can see if they both match each other.

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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by nedsaid » Fri Sep 06, 2019 8:30 pm

In fairness, determining a proper asset allocation is the most important and yet most difficult decision for an investor to make. Not certain that I have been doing this right myself but I probably have gotten this mostly right.

Benjamin Graham gave rather sensible advice, he said that an investor should neither be above 75% stocks or below 25% stocks. Another rule of thumb might be age in bonds minus 10. It seems that if there was a one size fits all allocation, 60% stocks/40% bonds would fit the bill. Mr. Bogle thought that retirees invested too conservatively and that 65% stocks/35% bonds was good for most investors. Also I have counseled people to look at the Target Date Funds of Vanguard, Fidelity, and T Rowe Price with the date closest to their projected retirement date to get an idea of what the best minds in the mutual fund industry are thinking. So there are some pretty good guidelines but everyone's situation is different.

So for advisors, not an easy thing to recommend the right asset allocations. The correct advice may not be the popular advice.
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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by willthrill81 » Fri Sep 06, 2019 9:19 pm

JBTX wrote:
Fri Sep 06, 2019 8:09 pm
If you weren't concerned about leaving an estate, and you have more than enough to take care of your future wants and needs, how or why is it rational to take an aggressive allocation?
Because you never really know that you have enough in your portfolio to meet your future needs any more than you know what the market's returns will be. More importantly, the more we have, the more we can give, and there's no upper limit to that.
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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by Dandy » Sat Sep 07, 2019 6:17 am

What these risk measures leave out is the atmosphere that occurs while your portfolio drops 50%. Media doom and gloom not only from formal new shows but from all shows/media. Also, rumors at work that there will be layoffs and maybe even some actual layoffs, etc.

Most people taking a risk questionnaire are doing it when the market is good or at least ok. They aren't even considering it during a major sell off. So this tends to overstate their risk tolerance.

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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by nps » Sat Sep 07, 2019 7:03 am

nedsaid wrote:
Fri Sep 06, 2019 8:30 pm
In fairness, determining a proper asset allocation is the most important and yet most difficult decision for an investor to make.
I don't think it's the most important. I would put savings rate way ahead in terms of importance.

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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by willthrill81 » Sat Sep 07, 2019 10:10 am

nps wrote:
Sat Sep 07, 2019 7:03 am
nedsaid wrote:
Fri Sep 06, 2019 8:30 pm
In fairness, determining a proper asset allocation is the most important and yet most difficult decision for an investor to make.
I don't think it's the most important. I would put savings rate way ahead in terms of importance.
You might be right. But it's hard for savings rate to overcome the low returns of a portfolio of nothing but CDs.
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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by White Coat Investor » Sat Sep 07, 2019 11:00 am

willthrill81 wrote:
Sat Sep 07, 2019 10:10 am
nps wrote:
Sat Sep 07, 2019 7:03 am
nedsaid wrote:
Fri Sep 06, 2019 8:30 pm
In fairness, determining a proper asset allocation is the most important and yet most difficult decision for an investor to make.
I don't think it's the most important. I would put savings rate way ahead in terms of importance.
You might be right. But it's hard for savings rate to overcome the low returns of a portfolio of nothing but CDs.
Sure, at the extremes. Phi Demuth argues that reducing taxes matters more than AA too. Certainly it matters more than if your AA is 60/40 or 70/30.
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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by Fallible » Sat Sep 07, 2019 11:19 am

unclescrooge wrote:
Fri Sep 06, 2019 8:26 pm
nisiprius wrote:
Fri Sep 06, 2019 8:10 pm
1) One reason why risk-profile questionnaires don't work is that all the ones I've ever seen, seem to me to be soft-pedalling the risk.

For example, stocks declined a bit farther than -50% during 2008-2009 by any measure I've ever seen. Well, having lived through it I can tell you that seeing the value of an investment cut in half is a shocker. But instead of hitting over the head with it--if I owned a stock investment that was cut in half--Vanguard chooses a time period with a -31% loss, almost as if they didn't even want to confront you with losing even a third. Yes, I do see that they are trying to get at rate as well as total decline.

Vanguard - Investor Questionnaire
From September 2008 through November 2008, stocks lost more than 31%. If I owned a stock investment that lost about 31% in 3 months, I would … (If you owned stocks or stock funds during this period, select the answer that corresponds to your actual behavior.)

[ ] Sell all of the remaining investment.
[ ] Sell a portion of the remaining investment.
[ ] Hold onto the investment and sell nothing.
[ ] Buy more of the investment.
2) Another reason why they don't work might be that they aren't intended to work. Their function might not be to assess, as honestly and accurately as possible, what your risk tolerance really is. It might be to keep the brokerage out of trouble for selling you unsuitable investments by putting you on record as being comfortable with a moderate level of risk.

3) I don't know how you could truly assess your tolerance for financial risk, but a few words on paper can't do it.
You should take a look at riskalyze.com.

It uses prospect theory to gauge maximum loss threshold and assigns a risk score. Then it uses statistical modeling to determine the risk score of your portfolio and you can see if they both match each other.
In his column linked to above, Allan Roth did take a look at Riskalyze:
I spoke to Michael McDaniel, co-founder and chief investment officer at Riskalyze, which says it builds “fearless investors.” First, he stated that its survey is only a starting point. He agreed it did not address the need to take risk, but said its risk score is used by the advisor to then help the client to adjust the portfolio based on need.

McDaniel disagreed with me, however, that the risk score isn’t stable over time, telling me scores only dipped slightly and briefly during down markets like the end of 2018. He did acknowledge that they have only been tracking the scores since 2011, so it hasn’t been tested during a bear market or when markets declined by more than 50%, as has happened twice since 2000.
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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by nps » Sat Sep 07, 2019 12:06 pm

willthrill81 wrote:
Sat Sep 07, 2019 10:10 am
nps wrote:
Sat Sep 07, 2019 7:03 am
nedsaid wrote:
Fri Sep 06, 2019 8:30 pm
In fairness, determining a proper asset allocation is the most important and yet most difficult decision for an investor to make.
I don't think it's the most important. I would put savings rate way ahead in terms of importance.
You might be right. But it's hard for savings rate to overcome the low returns of a portfolio of nothing but CDs.
Harder still for a miniscule savings rate to overcome a high savings rate invested in nothing but CDs.

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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by nisiprius » Sat Sep 07, 2019 12:48 pm

unclescrooge wrote:
Fri Sep 06, 2019 8:26 pm
...You should take a look at riskalyze.com.

It uses prospect theory to gauge maximum loss threshold and assigns a risk score. Then it uses statistical modeling to determine the risk score of your portfolio and you can see if they both match each other...
How would I go about doing that? I just poked around for five minutes on their site, which seems aimed at advisors, and couldn't figure any way to take the test.

The big question I have is, how do they put you into a convincing "virtual reality" situation? In the words of Fred Schwed (1940),
Like all of life's rich emotional experiences, the full flavor of losing important money cannot be conveyed by literature. Art cannot convey to an inexperienced girl what it is truly like to be a wife and mother. There are certain things that cannot be explained to a virgin either by words or pictures. Nor can any description that I might offer here even approximate what it feels like to lose a real chunk of money that you used to own.
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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by DetroitRick » Sat Sep 07, 2019 1:53 pm

I definitely agree with what he says. Two things especially hit home for me - the importance of your willingness to commit to your chosen asset allocation for a few years, and the consideration given to your NEED to take risk. The first seems like a given to me, and the second seems like pretty big omission to the whole process.

I never put much stock in these simplistic tools, just viewed them as a general starting point to my own thought process. I never felt they were intended to be any more than that anyway, so I'm not surprised. You cannot adequately assess risk with less than the 5 minutes of thought most of these assessments require. If only it were that simple.

I can see why this would be a challenge to any professional advisor though. When I've helped a few folks with their portfolio design, it struck me how difficult it can be to help them to make appropriate choices. Especially when most people I've dealt with don't have a clue about their own real risk tolerances, returns, or ultimate withdrawal plans. I feel fortunate to have been through enough different markets to know myself pretty well by now. And to have a very strong handle on my precise portfolio needs (withdrawals and timing). All that was a lot of work - it didn't just happen in a single day. So I don't care that my portfolio doesn't match most of these questionnaires - because I can identify and support (to myself only, the only one that really matters) my final choices.

Just for the heck of it, I re-took Schwab's current "Investor Profile Questionaire". It has been a few years since last doing so. It took all of 2 minutes.
But the results still don't resemble my own portfolio too closely. While I'm more aggressive than most for my age (I'm retired and drawing), Schwab's questionnaire points to my being at the far side of aggressive. Not appropriate for my set of circumstances. But then I don't view the more-typical retirement allocations as all that meaningful for me either. This is all part of a process - and there is no way to remove all of the ambiguity. If these simplistic tools just keep you away from inappropriate extremes, that is at least one benefit. But, yes, they are flawed.

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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by LilyFleur » Sat Sep 07, 2019 2:19 pm

Dandy wrote:
Sat Sep 07, 2019 6:17 am
What these risk measures leave out is the atmosphere that occurs while your portfolio drops 50%. Media doom and gloom not only from formal new shows but from all shows/media. Also, rumors at work that there will be layoffs and maybe even some actual layoffs, etc.

Most people taking a risk questionnaire are doing it when the market is good or at least ok. They aren't even considering it during a major sell off. So this tends to overstate their risk tolerance.
All the more reason to avoid TV news. Ever since I minored in journalism, I have not looked to the TV for responsible news coverage. It's shallow and sensationalist. I can't think of much positive about it, except not needing TV news means I don't have a cable TV bill each month.

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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by Random Walker » Sat Sep 07, 2019 2:22 pm

I have found Monte Carlo Simulation to be very helpful in determining the asset allocation. Larry Swedroe recommends we evaluate our ability, willingness, and need. When we get real about our goals, I think MCS helps tremendously in the need department. The risk questionnaires I think focus on ability and willingness. I think the combination of a risk questionnaire and MCS can be very productive. See what the least aggressive portfolio that meets needs is with MCS, see how that result meshes with a risk questionnaire or two, and then settle on an AA.

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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by willthrill81 » Sat Sep 07, 2019 2:34 pm

nps wrote:
Sat Sep 07, 2019 12:06 pm
willthrill81 wrote:
Sat Sep 07, 2019 10:10 am
nps wrote:
Sat Sep 07, 2019 7:03 am
nedsaid wrote:
Fri Sep 06, 2019 8:30 pm
In fairness, determining a proper asset allocation is the most important and yet most difficult decision for an investor to make.
I don't think it's the most important. I would put savings rate way ahead in terms of importance.
You might be right. But it's hard for savings rate to overcome the low returns of a portfolio of nothing but CDs.
Harder still for a miniscule savings rate to overcome a high savings rate invested in nothing but CDs.
Absolutely. It seems safe to say that both savings rate and AA are very important. Which is more important depends in part on what the other is. Moving from a 40% savings rate to 50% is probably less meaningful than moving from a 30/70 AA to a 70/30. Conversely, the difference between 50/50 and 60/40 is not likely to be as consequential as increasing one's savings rate from 15% to 25%.
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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by nps » Sat Sep 07, 2019 3:08 pm

willthrill81 wrote:
Sat Sep 07, 2019 2:34 pm
nps wrote:
Sat Sep 07, 2019 12:06 pm
willthrill81 wrote:
Sat Sep 07, 2019 10:10 am
nps wrote:
Sat Sep 07, 2019 7:03 am
nedsaid wrote:
Fri Sep 06, 2019 8:30 pm
In fairness, determining a proper asset allocation is the most important and yet most difficult decision for an investor to make.
I don't think it's the most important. I would put savings rate way ahead in terms of importance.
You might be right. But it's hard for savings rate to overcome the low returns of a portfolio of nothing but CDs.
Harder still for a miniscule savings rate to overcome a high savings rate invested in nothing but CDs.
Absolutely. It seems safe to say that both savings rate and AA are very important. Which is more important depends in part on what the other is. Moving from a 40% savings rate to 50% is probably less meaningful than moving from a 30/70 AA to a 70/30. Conversely, the difference between 50/50 and 60/40 is not likely to be as consequential as increasing one's savings rate from 15% to 25%.
I didn't say that the relative difference between two given savings rates was more important, I said that the savings rate was more important.

Here's a thought exercise. Let's say you had to pick just one - savings rate or asset allocation - and determine how you'd like to set it. The parameters of the one you did not pick would be determined for you at random. Which choice do you prefer?

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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by willthrill81 » Sat Sep 07, 2019 3:24 pm

nps wrote:
Sat Sep 07, 2019 3:08 pm
willthrill81 wrote:
Sat Sep 07, 2019 2:34 pm
nps wrote:
Sat Sep 07, 2019 12:06 pm
willthrill81 wrote:
Sat Sep 07, 2019 10:10 am
nps wrote:
Sat Sep 07, 2019 7:03 am


I don't think it's the most important. I would put savings rate way ahead in terms of importance.
You might be right. But it's hard for savings rate to overcome the low returns of a portfolio of nothing but CDs.
Harder still for a miniscule savings rate to overcome a high savings rate invested in nothing but CDs.
Absolutely. It seems safe to say that both savings rate and AA are very important. Which is more important depends in part on what the other is. Moving from a 40% savings rate to 50% is probably less meaningful than moving from a 30/70 AA to a 70/30. Conversely, the difference between 50/50 and 60/40 is not likely to be as consequential as increasing one's savings rate from 15% to 25%.
I didn't say that the relative difference between two given savings rates was more important, I said that the savings rate was more important.

Here's a thought exercise. Let's say you had to pick just one - savings rate or asset allocation - and determine how you'd like to set it. The parameters of the one you did not pick would be determined for you at random. Which choice do you prefer?
The exercise does not describe anything close to reality, so frankly, it's pointless.
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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by nps » Sat Sep 07, 2019 4:19 pm

willthrill81 wrote:
Sat Sep 07, 2019 3:24 pm
nps wrote:
Sat Sep 07, 2019 3:08 pm
willthrill81 wrote:
Sat Sep 07, 2019 2:34 pm
nps wrote:
Sat Sep 07, 2019 12:06 pm
willthrill81 wrote:
Sat Sep 07, 2019 10:10 am


You might be right. But it's hard for savings rate to overcome the low returns of a portfolio of nothing but CDs.
Harder still for a miniscule savings rate to overcome a high savings rate invested in nothing but CDs.
Absolutely. It seems safe to say that both savings rate and AA are very important. Which is more important depends in part on what the other is. Moving from a 40% savings rate to 50% is probably less meaningful than moving from a 30/70 AA to a 70/30. Conversely, the difference between 50/50 and 60/40 is not likely to be as consequential as increasing one's savings rate from 15% to 25%.
I didn't say that the relative difference between two given savings rates was more important, I said that the savings rate was more important.

Here's a thought exercise. Let's say you had to pick just one - savings rate or asset allocation - and determine how you'd like to set it. The parameters of the one you did not pick would be determined for you at random. Which choice do you prefer?
The exercise does not describe anything close to reality, so frankly, it's pointless.
Thought exercises don't have to be realistic to make a point and provide insight. Have you heard of Schrödinger's cat? But I digress...

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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by unclescrooge » Sat Sep 07, 2019 4:57 pm

Fallible wrote:
Sat Sep 07, 2019 11:19 am
unclescrooge wrote:
Fri Sep 06, 2019 8:26 pm
nisiprius wrote:
Fri Sep 06, 2019 8:10 pm
1) One reason why risk-profile questionnaires don't work is that all the ones I've ever seen, seem to me to be soft-pedalling the risk.

For example, stocks declined a bit farther than -50% during 2008-2009 by any measure I've ever seen. Well, having lived through it I can tell you that seeing the value of an investment cut in half is a shocker. But instead of hitting over the head with it--if I owned a stock investment that was cut in half--Vanguard chooses a time period with a -31% loss, almost as if they didn't even want to confront you with losing even a third. Yes, I do see that they are trying to get at rate as well as total decline.

Vanguard - Investor Questionnaire
From September 2008 through November 2008, stocks lost more than 31%. If I owned a stock investment that lost about 31% in 3 months, I would … (If you owned stocks or stock funds during this period, select the answer that corresponds to your actual behavior.)

[ ] Sell all of the remaining investment.
[ ] Sell a portion of the remaining investment.
[ ] Hold onto the investment and sell nothing.
[ ] Buy more of the investment.
2) Another reason why they don't work might be that they aren't intended to work. Their function might not be to assess, as honestly and accurately as possible, what your risk tolerance really is. It might be to keep the brokerage out of trouble for selling you unsuitable investments by putting you on record as being comfortable with a moderate level of risk.

3) I don't know how you could truly assess your tolerance for financial risk, but a few words on paper can't do it.
You should take a look at riskalyze.com.

It uses prospect theory to gauge maximum loss threshold and assigns a risk score. Then it uses statistical modeling to determine the risk score of your portfolio and you can see if they both match each other.
In his column linked to above, Allan Roth did take a look at Riskalyze:
I spoke to Michael McDaniel, co-founder and chief investment officer at Riskalyze, which says it builds “fearless investors.” First, he stated that its survey is only a starting point. He agreed it did not address the need to take risk, but said its risk score is used by the advisor to then help the client to adjust the portfolio based on need.

McDaniel disagreed with me, however, that the risk score isn’t stable over time, telling me scores only dipped slightly and briefly during down markets like the end of 2018. He did acknowledge that they have only been tracking the scores since 2011, so it hasn’t been tested during a bear market or when markets declined by more than 50%, as has happened twice since 2000.
Forget about Allan Roth thinks. Take a look at it and form your own opinion.

Risk tolerance can't be expected to be static. When the entire world around you is collapsing you're going to scale back. People who became more risk tolerant in such situations probably got weeded out of the gene pool.

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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by nisiprius » Sat Sep 07, 2019 5:11 pm

unclescrooge wrote:
Sat Sep 07, 2019 4:57 pm
...Forget about Allan Roth thinks. Take a look at [Riskalyze] and form your own opinion...
Their website is aimed at advisors, and it wasn't clear to me how to do that. If you've done it, please spell out how to go about it. If I "book a tour" do I actually get to use the tool? And will they be telephoning me at the phone number I provide?
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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by tooluser » Sat Sep 07, 2019 5:24 pm

Random Walker wrote:
Sat Sep 07, 2019 2:22 pm
I have found Monte Carlo Simulation to be very helpful in determining the asset allocation. Larry Swedroe recommends we evaluate our ability, willingness, and need. When we get real about our goals, I think MCS helps tremendously in the need department. The risk questionnaires I think focus on ability and willingness. I think the combination of a risk questionnaire and MCS can be very productive. See what the least aggressive portfolio that meets needs is with MCS, see how that result meshes with a risk questionnaire or two, and then settle on an AA.

Dave
Ditto + Stress Testing: Run some scenarios where at least the stocks portion of your nest egg is suddenly at 50% of what it was. Think through what that does to your current and future plans. Is that acceptable? For how long? (The market will very likely recover.) Should you change something as a result? It's not the same as experiencing the real thing - but thank goodness.

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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by Fallible » Sat Sep 07, 2019 7:02 pm

DetroitRick wrote:
Sat Sep 07, 2019 1:53 pm
I definitely agree with what he says. Two things especially hit home for me - the importance of your willingness to commit to your chosen asset allocation for a few years, and the consideration given to your NEED to take risk. The first seems like a given to me, and the second seems like pretty big omission to the whole process.
...
Agree on the client commitment and the need to take risk that Allan stresses. I think another key takeaway is his honesty with clients about risk to the point of inflicting pain (the “reality check”) if that’s what it takes. His references to behavioral economists Daniel Kahneman and Dan Ariely (and his previous writings about Kahneman and loss aversion, etc.) show a true understanding of behavioral finance and how (with an OK from Kahneman) to painfully apply it to investor behavior. No risk profile questionnaire needed here; just a desire to help clients choose an appropriate allocation they can stay with.
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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by nedsaid » Sun Sep 08, 2019 12:04 pm

nps wrote:
Sat Sep 07, 2019 7:03 am
nedsaid wrote:
Fri Sep 06, 2019 8:30 pm
In fairness, determining a proper asset allocation is the most important and yet most difficult decision for an investor to make.
I don't think it's the most important. I would put savings rate way ahead in terms of importance.
At 2% returns, you are going to have to have one heck of a savings rate. You need money to compound faster than that, particularly when you factor in inflation. Asset allocation and savings rate are both rather important.
A fool and his money are good for business.

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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by Random Walker » Sun Sep 08, 2019 2:36 pm

tooluser wrote:
Sat Sep 07, 2019 5:24 pm
Random Walker wrote:
Sat Sep 07, 2019 2:22 pm
I have found Monte Carlo Simulation to be very helpful in determining the asset allocation. Larry Swedroe recommends we evaluate our ability, willingness, and need. When we get real about our goals, I think MCS helps tremendously in the need department. The risk questionnaires I think focus on ability and willingness. I think the combination of a risk questionnaire and MCS can be very productive. See what the least aggressive portfolio that meets needs is with MCS, see how that result meshes with a risk questionnaire or two, and then settle on an AA.

Dave
Ditto + Stress Testing: Run some scenarios where at least the stocks portion of your nest egg is suddenly at 50% of what it was. Think through what that does to your current and future plans. Is that acceptable? For how long? (The market will very likely recover.) Should you change something as a result? It's not the same as experiencing the real thing - but thank goodness.
I use the same equity 50% decline (and assume bonds will go up about 5%) mind experiment myself.

Dave

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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by FrugalInvestor » Sun Sep 08, 2019 3:52 pm

The '08/'09 downturn was the litmus test for me. My target allocation at that time was 60/40 based on the Vanguard questionnaire, age rules of thumb, perceived need to take risk, etc. During the downturn I rebalanced as far as I could bring myself to do.....which ended up being to 50/50 (which was hard!) and that has become my benchmark since.

It was a great way to establish my risk profile but I don't wish it on anyone.
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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by dodecahedron » Sun Sep 08, 2019 4:28 pm

nedsaid wrote:
Sun Sep 08, 2019 12:04 pm
nps wrote:
Sat Sep 07, 2019 7:03 am
nedsaid wrote:
Fri Sep 06, 2019 8:30 pm
In fairness, determining a proper asset allocation is the most important and yet most difficult decision for an investor to make.
I don't think it's the most important. I would put savings rate way ahead in terms of importance.
At 2% returns, you are going to have to have one heck of a savings rate. You need money to compound faster than that, particularly when you factor in inflation. Asset allocation and savings rate are both rather important.
No guarantee that money will compound faster with any particular asset allocation over any other particular asset allocation. Yes, expected returns may be higher with more equities, but no guarantees that actual returns will be higher, so what you describe as a ¨proper¨ asset allocation may or not get you what you think you ¨need.¨

Saving more means learning to be content with a lifestyle that costs less, which--in my opinion--is more important to a fulfilling retirement than asset allocation. If you can find happiness living a (relatively) monastic lifestyle during your accumulation phase, you are more likely to be happy with a modest lifestyle in retirement.

So yes, I agree that saving more (and consuming less) is more important than asset allocation. I know many apparently contented retirees who have lived simply and frugally all their lives and are quite content in retirement, despite having asset allocations much more conservative than the Boglehead center of gravity.

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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by pkcrafter » Sun Sep 08, 2019 4:50 pm

Fallible wrote:
Fri Sep 06, 2019 6:37 pm
Allan Roth, a Boglehead and fee-only registered investment advisor, explains why he doesn't use the questionnaires with his clients:
I love the idea that risk tolerance is something that can be quantified by answering certain questions that magically reveal what your asset allocation should be. I’m opposed to using them, however, because reality indicates they don’t work. For example, the Vanguard survey said I should be 80% in stocks, while other surveys I’ve taken put me as high as 90% stocks. The lowest stock allocation I received from a questionnaire I took recently came from Riskalyze at 55% stocks.

According to these questionnaires, I should be between 55% to 90% stocks. Yet I won’t budge from my current target of only 45% stocks for three reasons:
https://www.advisorperspectives.com/art ... -dont-work

Has anyone taken a risk tolerance questionnaire and later found out it was wrong - or right?
Thank you, Fallible, for posting this interesting and honest article from Alan Roth. I attempted to tackle risk tests in this article:

https://finpage.blog/author/pkcrafter/


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by nedsaid » Sun Sep 08, 2019 5:48 pm

dodecahedron wrote:
Sun Sep 08, 2019 4:28 pm
nedsaid wrote:
Sun Sep 08, 2019 12:04 pm
nps wrote:
Sat Sep 07, 2019 7:03 am
nedsaid wrote:
Fri Sep 06, 2019 8:30 pm
In fairness, determining a proper asset allocation is the most important and yet most difficult decision for an investor to make.
I don't think it's the most important. I would put savings rate way ahead in terms of importance.
At 2% returns, you are going to have to have one heck of a savings rate. You need money to compound faster than that, particularly when you factor in inflation. Asset allocation and savings rate are both rather important.
No guarantee that money will compound faster with any particular asset allocation over any other particular asset allocation. Yes, expected returns may be higher with more equities, but no guarantees that actual returns will be higher, so what you describe as a ¨proper¨ asset allocation may or not get you what you think you ¨need.¨

Saving more means learning to be content with a lifestyle that costs less, which--in my opinion--is more important to a fulfilling retirement than asset allocation. If you can find happiness living a (relatively) monastic lifestyle during your accumulation phase, you are more likely to be happy with a modest lifestyle in retirement.

So yes, I agree that saving more (and consuming less) is more important than asset allocation. I know many apparently contented retirees who have lived simply and frugally all their lives and are quite content in retirement, despite having asset allocations much more conservative than the Boglehead center of gravity.
Your friends benefitted from twin bull markets in stocks and bonds. In fact, from about 1982-2013, Long Treasuries outperformed stocks by a hair. So the equity-like returns from bonds, fueled by a drop in interest rates from 14% to 3%, made rather bond heavy portfolios have very good returns. The allocation of stocks vs. bonds, in that environment didn't matter so much. Falling interest and inflation rates were gale force tail winds.

Going forward, hard to imagine that interest rates will fall all that far from 2%. Inflation is very tame compared to the 1970's, in fact deflation might be the bigger worry now. Unfortunately, just as future expected returns of bonds will fall, odds are very good that future expected returns of stocks will fall too. We experienced a rather golden age of investing.
A fool and his money are good for business.

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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by dodecahedron » Sun Sep 08, 2019 6:21 pm

nedsaid wrote:
Sun Sep 08, 2019 5:48 pm
dodecahedron wrote:
Sun Sep 08, 2019 4:28 pm
nedsaid wrote:
Sun Sep 08, 2019 12:04 pm
nps wrote:
Sat Sep 07, 2019 7:03 am
nedsaid wrote:
Fri Sep 06, 2019 8:30 pm
In fairness, determining a proper asset allocation is the most important and yet most difficult decision for an investor to make.
I don't think it's the most important. I would put savings rate way ahead in terms of importance.
At 2% returns, you are going to have to have one heck of a savings rate. You need money to compound faster than that, particularly when you factor in inflation. Asset allocation and savings rate are both rather important.
No guarantee that money will compound faster with any particular asset allocation over any other particular asset allocation. Yes, expected returns may be higher with more equities, but no guarantees that actual returns will be higher, so what you describe as a ¨proper¨ asset allocation may or not get you what you think you ¨need.¨

Saving more means learning to be content with a lifestyle that costs less, which--in my opinion--is more important to a fulfilling retirement than asset allocation. If you can find happiness living a (relatively) monastic lifestyle during your accumulation phase, you are more likely to be happy with a modest lifestyle in retirement.

So yes, I agree that saving more (and consuming less) is more important than asset allocation. I know many apparently contented retirees who have lived simply and frugally all their lives and are quite content in retirement, despite having asset allocations much more conservative than the Boglehead center of gravity.
Your friends benefitted from twin bull markets in stocks and bonds. In fact, from about 1982-2013, Long Treasuries outperformed stocks by a hair. So the equity-like returns from bonds, fueled by a drop in interest rates from 14% to 3%, made rather bond heavy portfolios have very good returns. The allocation of stocks vs. bonds, in that environment didn't matter so much. Falling interest and inflation rates were gale force tail winds.
Actually, the folks I was thinking of were not investing in stocks or bonds. They were mostly investing in things like direct CDs, stable value funds, GICs, and money market funds, in many cases largely in taxable accounts. And the after-tax after-inflation return on those fixed income investments may have been less than folks can get on today´s CDs.

Edited to add: look, I am not saying that asset allocation is not important, only that savings rate is even more important. To make this point as starkly as possibly, it does no good whatsoever to have chosen an ideal ¨perfect¨ asset allocation if you are spending more than you earn during the accumulation phase and therefore racking up more liabilities than assets.

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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by nedsaid » Sun Sep 08, 2019 6:59 pm

dodecahedron wrote:
Sun Sep 08, 2019 6:21 pm
nedsaid wrote:
Sun Sep 08, 2019 5:48 pm
dodecahedron wrote:
Sun Sep 08, 2019 4:28 pm
nedsaid wrote:
Sun Sep 08, 2019 12:04 pm
nps wrote:
Sat Sep 07, 2019 7:03 am


I don't think it's the most important. I would put savings rate way ahead in terms of importance.
At 2% returns, you are going to have to have one heck of a savings rate. You need money to compound faster than that, particularly when you factor in inflation. Asset allocation and savings rate are both rather important.
No guarantee that money will compound faster with any particular asset allocation over any other particular asset allocation. Yes, expected returns may be higher with more equities, but no guarantees that actual returns will be higher, so what you describe as a ¨proper¨ asset allocation may or not get you what you think you ¨need.¨

Saving more means learning to be content with a lifestyle that costs less, which--in my opinion--is more important to a fulfilling retirement than asset allocation. If you can find happiness living a (relatively) monastic lifestyle during your accumulation phase, you are more likely to be happy with a modest lifestyle in retirement.

So yes, I agree that saving more (and consuming less) is more important than asset allocation. I know many apparently contented retirees who have lived simply and frugally all their lives and are quite content in retirement, despite having asset allocations much more conservative than the Boglehead center of gravity.
Your friends benefitted from twin bull markets in stocks and bonds. In fact, from about 1982-2013, Long Treasuries outperformed stocks by a hair. So the equity-like returns from bonds, fueled by a drop in interest rates from 14% to 3%, made rather bond heavy portfolios have very good returns. The allocation of stocks vs. bonds, in that environment didn't matter so much. Falling interest and inflation rates were gale force tail winds.
Actually, the folks I was thinking of were not investing in stocks or bonds. They were mostly investing in things like direct CDs, stable value funds, GICs, and money market funds, in many cases largely in taxable accounts. And the after-tax after-inflation return on those fixed income investments may have been less than folks can get on today´s CDs.

Edited to add: look, I am not saying that asset allocation is not important, only that savings rate is even more important. To make this point as starkly as possibly, it does no good whatsoever to have chosen an ideal ¨perfect¨ asset allocation if you are spending more than you earn during the accumulation phase and therefore racking up more liabilities than assets.
Savings rates are important, I suppose savings rates could be so high that returns aren't so important. That isn't reality for most people, it certainly wasn't for me. In addition, folks can benefit from tax deferred compounding in IRAs and workplace retirement savings plans. In a taxable account, taxes take a haircut year after year. I also benefitted from rising stock and bond markets. As I recall, you and your husband were in Academia, not sure how applicable their experience is to most folks. Again, the bulk of the time your friends invested from 1982 to lets say 2008, had relatively high interest rates as compared to today.

Direct CDs, Guaranteed Interest Contracts, and Stable Value Funds had returns very similar to bonds. Money markets paid good interest until the 2008-2009 financial crisis. The kind of rates you could get from 1982-2008 are just not available today.

I remember that early on in my investment career, I purchased US Treasury STRIPS that locked in an 8% return, pretty sure those were 10 year bonds. There is just nothing like that today. I also remember that years after the 2008-2009 financial crisis, my interest rates from the bank and in my money market account were so low that I needed a microscope to see them. Last I looked, the US Treasury 30 year bond yielded just under 2%.

Most folks will need the added boost from stocks to help with a secure retirement. 2% just ain't going to do it unless one can achieve a very high savings rate and sustain that savings rate for years.

Looking at my current retirement account balances, about 1/3 are my contributions and about 2/3 are my earnings. Savings rates didn't save me by themselves, I needed investment returns as well. I had high savings rates but not high income. Many of your friends likely had both high savings rates and higher levels of income.
A fool and his money are good for business.

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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by Fallible » Sun Sep 08, 2019 9:03 pm

pkcrafter wrote:
Sun Sep 08, 2019 4:50 pm
...
Thank you, Fallible, for posting this interesting and honest article from Alan Roth. I attempted to tackle risk tests in this article:

https://finpage.blog/author/pkcrafter/
Paul
:thumbsup Thanks for posting your blog, which nicely brings out the emotional aspects of investing and how they are not brought out in questionnaires. I think an example is when potential investors are asked how they would react to a huge stock drop such as in the 2008 crash. Since they don't even own stocks yet, this seems about as emotionless a question as could be asked. Emotions, however, do underlie some questions, such as whether an investor would lower equities during market downturns.
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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by mickeyd » Mon Sep 09, 2019 9:40 am

Emotions, however, do underlie some questions, such as whether an investor would lower equities during market downturns.
Yea, that is so true. You gotta have a dog in the fight to appreciate what risk assumption is all about. When the S&P500 drops 100 points in a day, what does it feel in your gut? "So what, it will bounce back" or "Maybe I have too much in equities".
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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by jrbdmb » Mon Sep 09, 2019 9:52 am

LilyFleur wrote:
Fri Sep 06, 2019 8:11 pm
In today's Intelligent Investor column in the WSJ, "Knowing if You Can Stomach the Next Big Market Swing," Jason Zweig discusses risk tolerance quizzes and research on how FAs tailor AAs in various ways, rather inconsistently, to the same risk tolerance at times. He concludes, "The best guide to whether you will dump stocks in the next financial crisis is whether you did in the last one. If you weren't investing in 2008-9, look back at the fourth quarter of 2018, when stocks lost nearly 20%. Be sure to ask what your financial adviser did in past market plunges, too."
Bingo. There is huge difference in reading about a 30% or 50% market drop in a questionnaire, and actually living through the same thing. Like Mike Tyson said, "everyone has a plan until they get punched in the mouth." :happy

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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by dodecahedron » Mon Sep 09, 2019 3:06 pm

nedsaid wrote:
Sun Sep 08, 2019 6:59 pm

Savings rates are important, I suppose savings rates could be so high that returns aren't so important. That isn't reality for most people, it certainly wasn't for me. In addition, folks can benefit from tax deferred compounding in IRAs and workplace retirement savings plans. In a taxable account, taxes take a haircut year after year. I also benefitted from rising stock and bond markets. As I recall, you and your husband were in Academia, not sure how applicable their experience is to most folks. Again, the bulk of the time your friends invested from 1982 to lets say 2008, had relatively high interest rates as compared to today.
I wasn´t talking about my friends in academia. (Those folks mostly seem to keep working forever! And my academic friends generally don´t discuss finances.)

I was talking about retired people who are fellow volunteers or otherwise deeply engaged in a variety of community nonprofits with which I am involved. Also, relatives and family friends. They come from many walks of life. What they do have in common is that they know how to get a lot of joy out of life on a shoestring (free community cultural events, lectures, concerts, community theater, book discussions, volunteering as docents, nature hikes, Habitat, environmental lobbying, watercolor painting, making art out of recycled materials, gardening and growing own vegetables, mentoring in schools, singing in choir, etc.)

And that frugal lifestyle is largely the way my late husband and I raised our own daughters. Unless catastrophic things befall me (e.g., decades of LTC), they will likely inherit a significant financial legacy from my estate, but the habits of frugal simple living (and giving generously to charity) are an even more important legacy.

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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by nedsaid » Mon Sep 09, 2019 3:19 pm

dodecahedron wrote:
Mon Sep 09, 2019 3:06 pm
nedsaid wrote:
Sun Sep 08, 2019 6:59 pm

Savings rates are important, I suppose savings rates could be so high that returns aren't so important. That isn't reality for most people, it certainly wasn't for me. In addition, folks can benefit from tax deferred compounding in IRAs and workplace retirement savings plans. In a taxable account, taxes take a haircut year after year. I also benefitted from rising stock and bond markets. As I recall, you and your husband were in Academia, not sure how applicable their experience is to most folks. Again, the bulk of the time your friends invested from 1982 to lets say 2008, had relatively high interest rates as compared to today.
I wasn´t talking about my friends in academia. (Those folks mostly seem to keep working forever! And my academic friends generally don´t discuss finances.)

I was talking about retired people who are fellow volunteers or otherwise deeply engaged in a variety of community nonprofits with which I am involved. Also, relatives and family friends. They come from many walks of life. What they do have in common is that they know how to get a lot of joy out of life on a shoestring (free community cultural events, lectures, concerts, community theater, book discussions, volunteering as docents, nature hikes, Habitat, environmental lobbying, watercolor painting, making art out of recycled materials, gardening and growing own vegetables, mentoring in schools, etc.)

And that frugal lifestyle is largely the way my late husband and I raised our own daughters. Unless catastrophic things befall me (e.g., decades of LTC), they will likely inherit a significant financial legacy from my estate, but the habits of frugal simple living (and giving generously to charity) are an even more important legacy.
I did live a frugal lifestyle myself and saved diligently from my first job. Also I am a believer in charitable giving. A big thing for me was mostly driving used cars and keeping them up, so far I have never purchased a new vehicle though one was provided by my employer during my first job after college. I also sought to reduce my tax bill wherever I could. I worked a seasonal second job to pay for vacations.

My own experience was that a sustained savings rate over time was the biggest key to success but I also got a lot of help from the markets from reinvested interest, dividends, and capital gains. You can't invest if you don't save first.
A fool and his money are good for business.

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onthecusp
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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by onthecusp » Mon Sep 09, 2019 7:50 pm

nedsaid wrote:
Fri Sep 06, 2019 8:20 pm
Conversely, if you are an older investor used to big returns in the stock market who also has won the game, it feels very uncomfortable to de-risk, selling stocks to buy bonds. It doesn't feel comfortable but it is probably necessary to do so.

So in many ways, I think risk tolerance is an incorrect concept. Successful investing really has more to do with going against your emotions than seeking comfort.
nedsaid,
Moving up thread a ways, and I realize you have added nuance to this, but this comment rings very true for me. I'm nearing retirement and only started buying bonds about 3 years ago, after finding bogleheads. I'm still only at 15%.

I feel my risk tolerance is off the charts, so long as I am still in accumulation (saving almost 50% of my income right now). Yes, I'm used to big returns but also huge losses back before I focused on low cost index funds. I learned to shrug off objectively massive changes in balances. The last few months almost seem stable to me.

I can see that is not necessarily a positive trait as I plan to move to a part time basis and radically slow my contributions for a few years before full retirement. I need to increase my bond holding. Thanks for the reminder.

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nedsaid
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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by nedsaid » Mon Sep 09, 2019 8:24 pm

onthecusp wrote:
Mon Sep 09, 2019 7:50 pm
nedsaid wrote:
Fri Sep 06, 2019 8:20 pm
Conversely, if you are an older investor used to big returns in the stock market who also has won the game, it feels very uncomfortable to de-risk, selling stocks to buy bonds. It doesn't feel comfortable but it is probably necessary to do so.

So in many ways, I think risk tolerance is an incorrect concept. Successful investing really has more to do with going against your emotions than seeking comfort.
nedsaid,
Moving up thread a ways, and I realize you have added nuance to this, but this comment rings very true for me. I'm nearing retirement and only started buying bonds about 3 years ago, after finding bogleheads. I'm still only at 15%.

I feel my risk tolerance is off the charts, so long as I am still in accumulation (saving almost 50% of my income right now). Yes, I'm used to big returns but also huge losses back before I focused on low cost index funds. I learned to shrug off objectively massive changes in balances. The last few months almost seem stable to me.

I can see that is not necessarily a positive trait as I plan to move to a part time basis and radically slow my contributions for a few years before full retirement. I need to increase my bond holding. Thanks for the reminder.
Yep. As they say, denial ain't a river in Egypt. We all are in denial about getting older, I turned 60 last month. With a temporary stall in my career, I for the first time in years was not able to contribute to retirement plans in 2018. I don't have a long time horizon until retirement or big contributions to retirement plans anymore to bail out portfolio losses. Retirement is getting pretty darned close. Human capital is not what it was 20 years ago.

Even so, I am being dragged kicking and screaming into de-risking. At age 60, I have 61% stocks and 39% bonds and cash. Back in 2013, I was at 69% stocks and have been working towards a more conservative portfolio. I am probably still more aggressive than I should be but I have made progress.
A fool and his money are good for business.

hudson
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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by hudson » Tue Sep 10, 2019 7:35 am

FrugalInvestor wrote:
Sun Sep 08, 2019 3:52 pm
The '08/'09 downturn was the litmus test for me.
Me too.
2008 was a great risk-profile questionnaire!
Other questionnaires showed that I would be fine with 100% stocks.
The "2008 questionnaire" showed that 100% fixed income was more my style.

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Fallible
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Re: Allan Roth: Why Risk-Profile Questionnaires Don’t Work

Post by Fallible » Tue Sep 10, 2019 11:59 am

hudson wrote:
Tue Sep 10, 2019 7:35 am
FrugalInvestor wrote:
Sun Sep 08, 2019 3:52 pm
The '08/'09 downturn was the litmus test for me.
Me too.
2008 was a great risk-profile questionnaire!
Other questionnaires showed that I would be fine with 100% stocks.
The "2008 questionnaire" showed that 100% fixed income was more my style.
Good points on 2008. In my case, despite having been invested through the '87 crash, the '98 LTCM scare, and the 2000 tech crash, 2008 asked the toughest questions yet. In fact, they should be on any risk-profile questionnaire: how would you react to another 2007-2008 historic housing bust, market crash, global financial crisis, Great Recession, and credit crunch threatening total financial meltdown with no way to know how long they would last?
"John Bogle has changed a basic industry in the optimal direction. Of very few can this be said." ~Paul A. Samuelson

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