Many experts always say it's hard to teach someone how to invest because it's hard to teach someone how to behave. What they mean by that is your investment risk behaviour is intrinsically linked to risk tolerance. Understanding your risk tolerance is only one step of the puzzle - luckily there are many tools out there that can help you to understand your risk behaviour.
Firstly what is risk tolerance?
Risk tolerance is the degree of variability in investment returns that you’re willing to withstand in your financial planning. You need to have a realistic understanding of your ability to stomach large swings in the value of your investments; because if you take on too much risk, you might panic and sell at the wrong time.
A commonly used rating of measuring risk tolerance is ESMA that measures your risk between 1 and 7 - with 7 being the highest risk.
So what is risk behaviour and why is it different?
You’ve probably all heard of risk tolerance before but what about risk behaviour - you may be asking aren’t they the same thing?
Well, if 2020 has taught us one thing it’s that the world can change within an instant. What we knew before and what we know now are very different. But how did you keep control of your emotions?
It’s quite likely in the midst of the uncertainty you felt stressed, confused or even afraid. Just as your emotions affect your day-to-day life, your behaviour also plays a huge role in your investment strategy.
While proactive investors strive to keep their emotions under control - much of their behaviour is actually predetermined by their DNA.
Tools like DNA behaviour will assess your risk behaviour and tell you:
- How you tend to make investment decisions
- Your communication style
- How you react to market events
- What motivates you to achieve your goals.
The advantage of understanding your risk behaviour is two-fold.
Firstly, it provides the foundation to manage your wealth effectively . You can start to understand why you have a certain risk tolerance and who you are as a person, your personal financial preferences, attitudes, beliefs and experiences.
Secondly, it can empower the relationship you have with your financial advisor as they can build more personalised investment solutions suited to your unique needs. If they don’t truly understand who you are, how can they make informed decisions on your behalf?
You can take the DNA Behaviour assessment inside our app, simply visit www.yourarq.com.