“Getting to know you, getting to know all about you.”

Julie Andrews

At some point in the past you probably completed an investor risk tolerance questionnaire.

Today, you may be discovering that your risk tolerance isn’t immutable. It is influenced by factors such as:

  • Your most recent portfolio performance
  • The most recent investment performance of the people you speak to about investments (psst, they may not be telling you the whole story)
  • Your employment stability
  • Amount of excess cash you have after paying all lifestyle expenses (if pre-retirement)
  • Your proximity to retirement
  • How much you are withdrawing or depositing to your portfolio
  • Your partner’s risk tolerance
  • The level of trust you have with your financial advisor (if you work with one)
  • The dream you had last night
  • How patient or impatient you are by nature
  • If you are an optimist or pessimist
  • Your entire life history

Most of these factors change constantly, with your innate nature (patient and optimistic, for example) being more stable over time.  Some of these factors don’t show up in an investor questionnaire.

All investment advisors, financial planners, and robo-advisors must ask you to complete one of these questionnaires from a due diligence standpoint.  Most of them recommend an asset allocation based entirely on your answers. 

That is a mistake.

Let’s first agree on the definition of asset allocation.  From www.investopedia.com, asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance and investment time horizon.  The three main asset classes are equities, fixed income (bonds and similar) and cash – have different levels of risk and return, so each will behave differently over time.

The investor questionnaire that you completed is the starting point for a discussion around investment objectives and risk tolerance.  More times than not, after discussing a prospective client’s questionnaire responses, the individual changes some of their responses

That means the ultimate asset allocation recommendation we make is not a reflection of the initial questionnaire responses.  It is based on the finalized questionnaire, and an in-depth discussion that includes all of the factors mentioned above.

Do you have the “right” asset allocation?

If your asset allocation decision is made thoughtfully, and supported by a robust financial plan, you shouldn’t alter it unless:

  • Your portfolio needs to be rebalanced (the mix has strayed from the target due to market movements or cash flows)
  • Your personal circumstances have materially changed such that a strategy review is appropriate. A few examples of changes that should trigger a strategy review are:
    • Job loss
    • Maternity leave
    • Retirement
    • Material increase in cost of living (resulting in saving less if pre-retirement or withdrawing more if already retired)
    • Receiving an inheritance
  • Your asset allocation was established in the absence of a robust planning exercise and thorough discussion with your advisor, and you are questioning your strategy now.  Fix this by asking your advisor to go through this process with you.  If they suggest that it’s not important, or they just don’t offer that service, it may be time to find a new advisor or get some objective, fee-for-service advice from a financial planner.

Don’t wonder if your portfolio is structured optimally for your circumstances.  Do the work and/or demand your advisor does, to get it right.

  • Rona is registered through Caring-for-Clients for financial planning services. Financial Planning is not the business of or under the supervision of Queensbury Strategies Inc. and Queensbury will not be liable or responsible for such activities.
  • This information is of a general nature and should not be considered professional advice. Its accuracy or completeness is not guaranteed and Queensbury Strategies Inc. assumes no responsibility or liability.