Short term investor behaviour is a drag on long-term investment performance and the average investor forgoes 3% of returns each year due to the need for emotional comfort. Soa big part of an advisers job is to help clients get invested and stay the course.
Composure is a behavioural insight which helps to identify which investors are likely to be more anxious and jittery over the investment journey. Lower Composure investors are likely to be more reluctant to invest, and are more at risk of buying high and selling low.
Composure is different from Risk Tolerance, because it is more about short-term emotional reactions to fluctuations in the value of investments, whereas Risk Tolerance is more about a well-considered view of the balance between long-term risk and return. So, it’s possible for a client to have high Risk Tolerance, and low Composure – although this would be an especially difficult combination to have.
Outputs
The assessment places investors into three Composure categories from Low to High.
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Low |
You have low composure, which means you may be made anxious by the temporary ups and downs of the market, and be more likely to trade too frequently, or to buy high and sell low. You should not invest in any portfolio that is too far above your risk tolerance. |
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Medium |
You have medium composure, which means you can occasionally worry about the temporary ups and downs of the market, though this may only be a problem when things become particularly stressed. |
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High |
You have high composure, which means you are relatively unaffected by the temporary ups and downs of the market, and stay focused firmly on the long term. However, this can mean you don't pay enough attention at times, or don't take the time to ensure your overall wealth is properly organised and invested. |
How to use it
Composure moderates the extent to which you should increase the Suitable Risk Level (also known as Risk level on our API documentation), relative to the investor’s Risk Tolerance, for those investors that have High Risk Capacity.
Investors with Low Composure are likely to panic and worry more when markets fall and as a result it may be less appropriate to increase risk relative to Risk Tolerance. In some cases it might be better to adopt a lower Suitable Risk Level to help investor’s stay the course, even if this means accepting lower long-term returns.
Investors with Low Composure may also need more guidance and hand holding to get invested and to stop them from selling at the wrong time. You should educate Low Composure investors for the inevitable times when markets fall by reinforcing that investing is not a smooth journey using visualisations and explaining how the portfolio could perform in a down turn. If stock market do fall sharply you should contact lower Composure investors first as they will be worrying more and are more at risk of selling into a falling market.
Investors with High Composure are less likely to panic when markets fall and may even see a market correction as a buying opportunity. If an investor has High or Medium Composure and their Risk Capacity is High, it could be suitable to increase their Suitable Risk Level relative to their Risk Tolerance.
If you use the Financial Circumstances Assessment, the investor’s Risk Capacity score will automatically increase or decrease the Suitable Risk Level relative to Risk Tolerance. If the Financial Circumstances Assessment is not used you should make your own assessment of Risk Capacity and pick a Suitable Risk Level taking into account the investors Composure and Knowledge and Experience.