Emergency fund impacting risk profile of investor

[Moscyn]

Just to share a recent experience - I was recently reminded by my bank (whilst this bank is in Hong Kong, it is a large global bank listed in various stock exchanges) to refresh my risk profile assessment as an investor. I normally do not bother but since I was in the bank anyways, I was just curious whether they have upgraded their test since the financial turmoil.....it appears they have changed and added more questions in their assessment. The rank results are something like (not exactly as I've forgotten) - "no risk", "cautious", "average", "reasonable risk" and "adventurous". I told them I did not agree to one of the questions which asked whether I have an emergency fund and if so, how many months. Before I answered this question, I had a risk profile of average but when I gave an answer of 9 months or more in emergency fund, the assessment raises my risk profile to adventurous. When I chose 6 months of emergency fund, it classified me to reasonable risk taker. My view is that emergency fund is a basic requirement before one enters into the realm of investing and thus should not be included as a factor to assess risk profile of an investor. Being a cautious person, I indicated in the assessment profile that I do not agree with the assessment - just in case I get many calls trying to sell me some sophisticated high risk products. Can't be too careful these days.... Oh, the bank said that they will feedback my comment to their management.

[ziggy29]

On one hand, I do agree that emergency funds and long term investments are two different things with two different purposes in a financial plan. On the other hand, the size of an emergency fund can potentially speak to risk tolerance. Someone who wants a year of expenses in a fund might be seen as more conservative than someone who is content with three months (all else being equal).

But then there are outliers. I have a pretty decent risk tolerance for long-term investments but I am building an emergency fund to the point of borderline paranoia given this economy and our situation.

[kumquat]

I'd guess that the quiz should show a lower risk tolerance as you increase the length of time the emergency fun lasts. Did the quiz really show the reverse?

[se012101]

^I would have assumed the same. I suppose the logic could be along the lines of "since I have this big emergency fund, now I can do all this risky stuff".

[LOL!]

OTOH in a perverse sort of way someone with a large emergency fund could potentially take on more risk with their investments since they can wait through a short downturn without affecting their monthly budget.

[ziggy29]

Quote:

Originally Posted by LOL! OTOH in a perverse sort of way someone with a large emergency fund could potentially take on more risk with their investments since they can wait through a short downturn without affecting their monthly budget.

I do agree. but the financial ability to assume more risk and the tolerance to do so are often two different things.

It seems to be often true that those who are in the position to be able to assume a lot of risk are the same ones who don't need to take the risk to reach their goals.

[brewer12345]

Can't speak to the oddities of this bank's risk tolerance questionnaire, but in corporate credit analysis you often see that the wobblier companies in worse shape have very significant amouns of cash sitting around because they know there is a good chance they will need to scratch to carry them at some point. So there is some logic to why a large emergency fund suggets higher risk tolerance.

[audreyh1]

Sounds to me like a gimmick to try to push an investor into a higher risk tolerance or a valid candidate for riskier products and therefore make them "eligible" for the more questionable products the company can push. CYA

Audrey

[jazz4cash]

I agree with Audrey. I always assumed such assessments were oriented towards folks that might not have much concept of risk tolerance on thier own, AND to protect the financial institution from claims of unsuitability. I glance at these from time to time to "see where I fit" in thier definition of hi/med/lo risk profile but can't recall making any changes as a result.