Math > Stereotypes

By Mike McDaniel, Chief Investment Officer

“A man has got to know his limitations.” —Dirty Harry

The first time I saw the technology at the heart of Riskalyze, I became a believer.

I was 30 years old, with the majority of my investment capital in FDIC-insured investments. For years, I bucked the conventional wisdom that I should be more aggressively allocated simply because I was young. My fellow advisors would say, “look, you’ve got plenty of time to recoup if it takes a dive…you should be fully invested in stocks at your age.”

Perhaps I’ve been risk averse since birth, or maybe it was that my career as an advisor began amidst the dot-com crash, but I’ve always had a deeply-rooted aversion to risk.

I trudged along, invested very conservatively, all the while second guessing myself. Worse yet, there were times (most often at market tops) that my emotions would convince me to invest outside of my risk tolerance. Then came the inevitable market drop, I got worried, and I’d sell for a loss.

Then it happened. I completed my first Riskalyze questionnaire and my Risk Number was 30. The mathematician monitoring my answers thought something was wrong with the math. Could I really be a 30 at my age? Could I really be content with that kind of portfolio? Could it be that taking more risk than that puts me in an emotional state where I make stupid decisions?

The answer was YES to all three questions.

For the first time ever, a risk questionnaire nailed my risk tolerance and confirmed what my gut had been telling me for years. I am always happy to trade upside potential to protect myself from downside, and almost all of my bad investing decisions have come from being invested outside of my comfort zone.

I’ve been using Riskalyze methodology to measure my risk tolerance for just about six years now. My Risk Number has been extremely consistent, ranging between a 29 and 32. Knowing this has been incredibly powerful for my investing.

Ultimately, my experience taught me something very powerful: math is greater than stereotypes. I feel empowered with the ability to keep myself invested over the long run, and I know it’s producing better results than if I let stereotypical risk tolerance suck me into the “buy high, sell low” cycle again.