Risk Profiling
Introduction - Risk Profiling
Profitable asset allocation depends on 2 factors:
- Understanding investors' risk tolerance and
- Market Timing.
Risk Profiling includes understanding of
- Risk Tolerance - the risk normally chosen by the client, it's a psychological trait.
- Risk Required - How much risk is needed to achieve your financial goals?
By understanding the investors' risk tolerance, we can use the score to match with the NEEDS of the clients to their EMOTION.
The law of purchase always reminds us that people buy things because they need it and they are emotionally engaged to the thing. Hence, get your clients want your financial products and make them emotionally engaged by understanding their needs.
Now, you're achieving your goals by helping them achieve theirs.
Gap Analysis
Psychometrics
Psychometrics, a blend of psychology and statistics, is the science of test construction. It is an established discipline which provides standards against which tests can be evaluated.
Psychometric standards provide benchmarks against which a risk tolerance questionnaire can be evaluated.
A robust questionnaire is, in psychometric terms, one that is valid and reliable, where,
Valid means that it measures what it purports to measure, and Reliable means that it does so consistently, with a known level of accuracy.
Gap Analysis
"Gap analysis" is a phrase we coined to describe the process by which an investor's risk tolerance can be compared to the risk inherent in the portfolio required to achieve their goals (in shorthand "risk required") and, if there is a mismatch between risk tolerance and risk required, how the mismatch is resolved.
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