A Behavioral Science Approach To Risk Management

Managing investment risk is in part a paradox of choice. In a presentation on risk tolerance and taking a behavioral science approach to risk management, Morningstar’s Stephen Wendel noted that investors destroy their wealth most often at emotional points. Are risk management questionnaires a waste of time, as articles in ValueWalk have previously stated?

Plan for it: Risk tolerance driven by emotional state of mind

When markets are at a high and investors “think money grows on trees,” investors are willing to take more risk than would be their norm. Buying at the top is obviously negative towards long term portfolio returns, but selling at the bottom is also a wealth destruction method, Wendel noted.

Traditional approaches to a financial advisor...