There are many salesmen who carry a form for risk assessment. The questions asked in the form are of the type, “Would you like to invest in mutual funds?” “How much risk are you prepared to take?” and so on. Suppose you were asked to answer similar questions, the chances are that you will either not answer or give answers merely to satisfy the person asking you. In either case as an investor, you would be confused. If you attempt to answer you know that the answers do not represent your thoughts. You would also know that there are no sets of questions that can draw out your thoughts on risk taking ability in a correct and accurate manner.

Unless you have been considering the subject of investment in a serious manner for a considerable period of time you will never be able to say whether you want to take more risk or less risk. Or express yourself on whether you want to take “high risk”/ “medium risk”/ “low risk”.

We must treat all such questionnaires or forms as a gimmick designed to lure investors into making wrong investments. Unless a person has been seriously involved in investment decisions over a period of time, it is very difficult to articulate risk preferences clearly.

Equally difficult to state your investment objective

Linked to this is the ability to state your investment objective clearly. An investment objective can be articulated with a reasonable degree of accuracy only by an active investor who spends at least a few hours every week studying investments. An investment objective is stated in terms of the expected return. Suppose you were asked the question,

Would you like to earn 12.5 % or 15 % on your investments during a year? What is your investment objective?

I wonder whether you will be able to answer the question. Most people will answer saying they want to earn as much as possible with the least risk. The response we get is because most people have no basis on which they can say how much returns should be expected or how much risk they want to take.

Do you see a similarity with your own goal setting activity for your new business income in life insurance? Everyone knows it is important, and everyone knows it needs to be done. But unless you have some experience in sales it is nearly impossible to set your goals and prepare a realistic plan for execution. This is one of the chief reasons that the goal setting activity fails for most agents and their supervisors.

It is important to have extended conversations with customers to understand their risk-taking ability. It does not come by administering a form or by setting investment return objectives.

Read more about these issues in “Ignis Fatuus: The Delusions Created in you and for you by the Investment Sector“. Available on Amazon: https://lnkd.in/dR9yuJVQ