Sherman Hanna is a professor of consumer sciences at The Ohio State University. He is also the co-author of a new measure that he says is a better way to calculate how much risk people are willing to take in their investments. It has an interesting twist.According to Hanna, financial planners are in agreement that measuring risk tolerance in their clients is highly important; however, he contends that there has been, up to now, no generally accepted way to do it. "A lot of the measures that are used are based on intuition and are not backed by solid research." In fact, he points out that many such measures wind up asking highly complicated questions that he feels many people simply do not understand. Hanna's new measure and a study testing it are published in an issue of the journal, Financial Counseling and Planning.
He maintains that many surveys measuring risk tolerance have results that aren't plausible. He cites one example, of many: one survey found that nearly one-quarter of respondents aged 51 to 61 had very high risk tolerance and suggested that they would be willing to take greater risks with their portfolios. These, he says, are the same people are who close to retirement and presumably would be more interested in protecting what they have.
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