Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn


Avoiding comfort

Shani Jayamanne  |  24 Jun 2021Text size  Decrease  Increase  |  
Email to Friend

In Australia, especially if you have sought professional financial advice, you would be familiar with the concept of risk tolerance. Risk Tolerance Questionnaires are a regulatory requirement for financial advisers to ensure they are doing their due diligence and understanding their clients—they’ve even been adopted by robo-advice and self-help tools. These questionnaires do what it says on the box—it’s a short questionnaire—usually between 8-10 questions, that measure how much risk you can tolerate, or the degree of volatility you can withstand when it comes to investing.

Based on your answers to these questions, you will be assigned an asset allocation for your portfolio (good financial advisers will of course, ask for more context than just the answers to these questions).

At Morningstar, we’re proponents of goals-based investing, and believe that in investing, what is comfortable is rarely profitable. Risk Tolerance Questionnaires base your asset allocation on how comfortable you are with risk, as opposed to what you need to achieve your financial goals.

We believe in constructing your portfolio around your goals, instead of how you react to loss. This approach is called risk capacity, and it focuses on the amount of risk that an investor must take in order to reach their financial goals. Risk Tolerance Questionnaires may ask you to take on too little or too much risk, as it completely ignores your time horizon or required rate of return.

Detailed in our Guide to Portfolio Construction, there’s a four step framework to translate your goals into a portfolio centred around goals:

Define your goals

Professional investors often use an Investment Policy Statement (IPS) as a tool to define their goals. Find more information about how to create your own IPS in our Guide to Selecting Investments.

Calculate required rate of return

Our rate of return calculator will give you the goal posts you need to get to your financial goal.

Select asset allocation target

Investing Compass
Listen to Morningstar Australia's Investing Compass podcast
Take a deep dive into investing concepts, with practical explanations to help you invest confidently.
Investing Compass

Not sure how much exposure you need to each asset class? Our asset allocation models provide guidance.

Select investments

Direct equities? Collective investment vehicles? Active or Passive? The Guide to Selecting Investments discusses the trade offs that you will make, and what might suit your circumstances. Find your investments through Discover Investments.

Investing in what is ‘comfortable’ often means that you are often investing blind to your actual investment goals. If volatility makes you nervous, that realistically does not change the return that you need to achieve them. Constructing your portfolio around risk capacity, instead of tolerance will give you a better chance of reaching your financial goals.

is an investment specialist, Individual Investor, Morningstar Australia.

© 2022 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend