Ever wonder what the Detailed Questionnaire means when it asks the client to define a devastating loss?
The Riskalyze risk questionnaire is all about understanding when an investor prefers certainty, or when they would rather trade that certainty away to take a particular risk.
The Detailed Approach questionnaire begins by establishing an individual’s investment amount, and their devastation amount. Financial devastation is defined as "the amount where the investor feels they will have to take painful and unexpected action, as it is highly likely their finances will never have a chance to recover."
In almost every risk questionnaire, the first question will present itself as a choice between a 10% gain, or trading that gain away to take a 50% risk of falling to the investor’s devastation amount.
We chose that starting point for a specific reason: we have yet to find a client who would seriously turn down a 10% gain in exchange for a coin flip's chance of becoming financially devastated. Devastated. Not, "impacted" or "unhappy," devastated.
Ultimately, if someone indicates that losing less than 10% of the investment amount triggers financial devastation, it's likely that they have misunderstood the term devastation or they have effectively just self-selected out of taking any investment risk.
To ensure accuracy, it is critical that the devastation amount be completely unacceptable and truly devastating to the investor.
PRO TIP: The most successful advisors understand the methodology behind the questionnaire and guide their clients through it. Check out our Riskalyze Academy Lesson on Guiding a Client Through the Detailed Questionnaire for an interactive tour!