Definition
Composure is a measure of an investor's tendency to become anxious during their investment journey.
It’s different from Risk Tolerance, because Composure is more about short-term emotional reactions, 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, but low Composure – this would be an especially difficult combination to have!
Outputs
Clients are given a Composure score on a scale of three: Low, Medium and High.
Client-facing descriptions for each level are shown below:
Composure | Description |
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. |
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. |
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
Suitable Risk
Composure acts as a cap on any increase in Suitable Risk above a client’s Risk Tolerance which might otherwise be justified by a high ability to take risk.
Communications
Clients with low Composure may need guidance and hand-holding to prepare them for, and lead them through, times when they may be tempted to sell their investments in a desire for emotional relief.
On the other hand, clients with high Composure may need to be encouraged to pay attention to their investment portfolios, to ensure that it is efficient and in line with their objectives.
You may wish to use the Composure scale to identify clients to talk to first during times of market volatility. For example, clients with high Composure may see setbacks as opportunities for further investment, while clients with low Composure may need comfort and reassurance.
Click here now to request a free trial of Oxford Risk’s Investment Compass tool.
Comments
0 comments
Please sign in to leave a comment.