NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Behavioural Finance in Practice
Caselet: Mr. Arvind Sharma, 58, has a portfolio worth Rs 2 crore. He says he can tolerate 'any fall' but, during the last 15% market fall, he sold all equity at the bottom and stayed out for two years. His risk-profiling questionnaire scored him 'aggressive'. What should the adviser conclude and do?
The adviser should treat the questionnaire as unreliable and give weight to his actual behaviour in the downturn. A more moderate allocation with a pre-agreed rebalancing rule is suitable, because it is one he can stick with during market falls.
- AAccept the questionnaire result as it is the formal measure of risk tolerance and keep an aggressive allocation
- BTreat stated risk tolerance as unreliable, weigh his actual behaviour in the downturn, and set a more moderate allocation with a pre-agreed rebalancing ruleCorrect
- CMove him fully to cash since he has shown he cannot handle any volatility
- DIncrease equity further so that he gets used to volatility
Explanation
Stated tolerance often diverges from revealed behaviour under stress. The adviser should give weight to the actual panic selling, lower the equity allocation to a level he can hold through falls, and agree a written rebalancing policy to limit emotional decisions. Going fully to cash ignores his need for growth over a long horizon, while an aggressive stance repeats the failure.
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