Jason Zweig, a personal finance columnist for The Wall Street Journal and the author of Your Money & Your Brain (one of the first books to explore the close connection between our mind and investing), believes that risk profiling is a waste. He argues that nobody has a single level of ‘risk tolerance’, that can be measured as precisely as our shoe size. “Among the countless dumb ideas pervading the investment industry, this may be the dumbest of all.”

 

According to Zweig, how much risk you can stand depends on what mood you happen to be in, when questioned. People whose anxiety level was raised by being told to imagine that they were summoned to the doctor’s office to discuss an urgent medical matter preferred to take a safer financial bet than people in a calm mood. Your willingness to take chances with your money depends on several factors which keep changing. Investors’ needs vary across their lifetime; initially, they look to finance their marriage and/or buy a house; later on, they look to save for their child’s education and their own retirement. Risk tolerance is different for each of these objectives.

 

When Moneylife reviewed a few quizzes, it found that there was utter lack of standardisation in how questions were framed. Each had a different set of questions. The number of questions ranged from six to 20. Some questions were vague like: 

 

(1) Maximum allocation in your current portfolio pertains to: 

(a) Savings & Fixed deposits; 

(b) Bonds; 

(c) Equities; 

(d) Mutual Funds.

 

(2) In order to achieve high returns, I am willing to choose high risk investments: 

(a) Strongly agree; 

(b) Agree; 

(c) Neutral; 

(d) Disagree; 

(e) Strongly Disagree.

 

If one could answer these questions, one would already know one’s risk profile. Then there were questions which had nothing to do with investing, like, “I generally prefer to stay in a familiar situation, rather than take a chance on a new situation.” Or “Your company has an attractive Voluntary Retirement Scheme (VRS) open only to 10% of employees on a first-come-first-serve basis.” Or “You have saved for a long time to buy a car. A week before you buy the car, you lose your job.” These questions have nothing to do with overall risk tolerance and are entirely situation-dependant.