Is The 95% Probability Range Accurate?

By Michael McDaniel, Co-Founder and Chief Investment Officer

It's very rare to hear a member of our team use the words, “I can’t.” Recently, we tasked our incredible team of engineers with a project that first required them to identify securities and portfolios that broke out of Riskalyze's six-month, 95% probability range. One member of the team told me, “I ran queries on over 100,000 portfolios and I can’t find any that have broken out of range!” For someone tasked with finding a needle in a haystack, their frustration was understandable. To be honest, I'm thrilled they had such a difficult time finding portfolios that broke out of the six-month, 95% probability range.

Why? Because our job is to build processes upon methodology that is both robust and actionable. Advisors coach and engage with their clients to make informed investing decisions using Riskalyze. Routine accuracy tests confirm that we're equipping advisors with robust methodology when it comes to our probability ranges and corresponding Risk Numbers.

Further random samples failed to produce significant examples of portfolios breaking out of range. In a search for rogue securities and portfolios, we decided to put our methodology through the proverbial ringer by hand picking a myriad of difficult six-month epochs from the past couple of years. We hand-selected a variety of ranges where the markets jolted downward and were very pleased with the results.

Here's a sample:

We define a "portfolio" as an account or multiple accounts that contain at least two securities. With over 100,000 unique portfolios analyzed (see "Random Samples" above), we saw an average of 0.63% break below the projected six-month range; well within expectations.

This data set is focused primarily on 2014-present, when markets overall (except in instances like those cited above) have been in a relatively low volatility state. We can’t predict the future or alert advisors as to when the next low probability event (think "Black Swan" or "2008") will be, but that’s why our 95% probability range acknowledges that there's a 5% chance of outcomes we can't quantify.

At Riskalyze, we'll continue to review our methodology meticulously. I'm always enthused to see reminders that our Riskalyze methodology continues to lay a solid foundation upon which advisors empower fearless investing!