Investing is Broken Part 1: Stereotypes Don't Work

For decades, the industry has followed the same thought patterns: young people have time to make up for market losses, so they must have an aggressive risk tolerance; whereas, older investors need to preserve the wealth they’ve already built, so they must have a conservative risk tolerance. Everyone else? Dashes of both. Did you know that, in most cases, those assumptions are dead wrong?

The industry has used antiquated terms like “aggressive” or “conservative” to make investment recommendations for decades. Not only are these terms subjective (conservative means something different to you than it does to me), they’re based on stereotypes that don’t hold water.

Every investor has a unique tolerance regarding risk and reward that is frequently independent of age. After combing through our risk assessment data, we found that 52% of 20-29-year-olds don’t fit their “aggressive” stereotype. And stereotypes don’t work any better for older folks. 53% of 70-79-year-olds didn’t fit into their “conservative” stereotype, either. Imagine if smartphones only worked <50% of the time—would people still buy them?

What happens when more than half of all investors are invested incorrectly? They panic during market volatility. Some feel greedy and buy; others sell out of fear. Both reactions might negatively affect their long-term goals. This cycle repeats itself until they eventually change their investment strategy, fire their advisor, or both.


Basically, stereotypes suck.


Let’s talk about words like “moderate” and “aggressive.” When building a house, you don’t see contractors using blueprints referencing a “conservative” hallway leading to a “moderately aggressive” kitchen (if you do, you might want to find a new contractor!). They measure with feet and inches.

When it matters, we use numbers. So why don't we build investment roadmaps that way?

When an advisor stereotypes an investor, they’re not seeing the investor as an individual with a unique appetite for risk. The result is that natural fluctuations spark panic and human nature takes over. If a young investor doesn’t fit their “aggressive” portfolio, wild swings in that portfolio go against their instincts. It becomes an increasingly impossible task for an advisor to convince their client to “stick with it” and stay focused on their long-term goals.

Let’s start treating investors as the individuals they are. Let’s empower fearless investing by getting a clearer image of risk tolerance and measuring it quantitatively.


Ready for Part 2? "Investors are Overwhelmed"

Part 3: "Bad Expectations Sabotage Us"

Part 4: "The Short Term Gets Ignored"