Let's sleep on it
Are you the type of person who lies awake at night, worrying how the share market will move the next day? It might be that your perception of risk is different to someone who sleeps undisturbed through market ups and downs. Academic and author Victor Ricciardi writes that these sorts of emotional factors play an important role for individuals and their investment choices.
Conservative – or not?
Arguments about the way investments are named also come into play here. Is one person’s “conservative” fund another’s high-risk fund? In the United Kingdom, the Association of British Insurers this year dropped the names “cautious” and “balanced” for managed funds because investors found them confusing. The names were replaced with risk-based labels, such as Mixed Investment 20-60% Shares for the fund that was formerly named Cautious (up to 60% equity) Managed, that the ABI say are less likely to be misinterpreted.
What will our retirement look like?
Behavioural economist Dan Ariely blogs that it is important to ask the right questions when trying to determine our attitudes to risk. He says, for example, an experiment found that people will often give themselves the same mark on a risk scale, no matter what type of risk profile is represented. So someone who thinks they are a little above the mean risk-taker gives themselves a 7 out of ten, no matter if the scale ranges from cash at the low-risk end to 85% shares at the high end or if it ranges from bonds at the low-risk end to derivatives at the high-risk end.