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We fear volatility when it comes to investing because we think it automatically means losses. However, volatility is a natural part of investing. The higher the volatility, then the higher the possible return, and the lower the volatility, the lower the return.

It’s the same way with everything else in life. The faster you drive the more risk or volatility you can have, but many are willing to take that chance to arrive at their destination sooner.

In this episode, we want to introduce you to a tool that will help you choose peace over worry when it comes to your investments called Riskalyze®. Riskalyze® is a financial technology company that provides software for analyzing investment risk and building and implementing investment portfolios. Bob and Mary Jo interview special guest, Mitch Mitchell, who is the Customer Success Manager for Riskalyze® to give a complete breakdown of this piece of technology, how it works, and how you can use it.

GUESTS: Mitch Mitchell, Customer Success Team Manager at Riskalyze®

Want to ask a question about your specific situation? Schedule a complimentary 15 minute phone call.

[INTRO]

BOB:

MJ:

Bob:

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[EPISODE]

BOB:

MJ: Today on Christian Financial Perspectives, we will be talking about taking the fear and worry out of investing.

BOB:

MJ:

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Mary Jo, investors are much more likely to fear losses than they are to celebrate the gains in their portfolios. I always see that. You know, I notice this because we never seem to get the emails or phone calls as long as their investments are going up in their portfolios. When it goes down for a few days or a few weeks and they get that monthly statement, the phone rings and the emails start coming in. Why is that? Why do you think that it?

MJ:

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As advisors, we talk a lot with our clients about understanding their risk tolerance. We ask a lot questions. We drill down to see how they’re going to react to volatile markets and what kind of returns they expect on their portfolio, how much downside they can stomach in a down market, what’s going to keep them up at night. That’s how we try to figure out what is the most appropriate investment for them.

In the past, we’ve always done this using percentages. It’s made sense to us because we talk about the market in percentages. We talk about returns as percentages. It’s just kind of in our DNA and how we were trained. But, when it comes to our clients, I don’t think those percentages actually resonate so much. It was our best guess as to what percentage of stocks and what percentage of bonds was appropriate based on how they answered our questions. But, you know, I just don’t think when you tell a client that they should be in 60% stocks and 40% bonds that the majority of them actually know what that means.

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MITCH:

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Welcome, Mitch!

MITCH:

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A customer success manager is specifically focused on the success of the customer. I recently went to Pulse, which is the largest customer success conference in the country. It’s put on my Gainsight.

MJ:

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Another way to put Riskalyze is that it is a risk alignment tool, which is another oversimplified way of saying it, which isn’t quite as interesting as the story behind it.

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Nobody would take this bet. So he would up the ante. “Okay, how about my eleven dollars versus your ten,” and no one would take it. “Okay, how about my twelve dollars versus your ten? Bear in mind, we can play this over and over again.” No one would take it. What he was able to do by repeating this is he was able to empirically and objectively measure just how much people hate losing more than they love winning. Let me say that again. He was able to objectively and empirically measure just how much human beings hate losing more than they love winning. That is the kind of fear that drives people away from investing. They fear losing what they have more than they would love growing what they have.

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So, one of the ways that we help people and advisors is that we help advisors objectively measure, empirically, in the same way Kahneman did, just how risk averse various investors really are. We put a score, given to that client based on a Riskalyze questionnaire, that e,piraclly measures just how much they are willing to risk losing in the short term in order to make sure that they can grow their investments in the long term.

One piffy way that our founders have put that recently is “helping investors to invest wisely for the long term making good long term decisions one good, short term decision at a time.”

BOB:

MITCH:

So, what this questionnaire does is help to quantify the potential loss tolerance of the investors. I loved your speed limit analogy that you said earlier necause you are going to get to your destination a lot more quickly iof you are traveling at 75 mph. The risk of course, there, is that if you experience a crash at 75mph, it’s going to hurt a lot more than if you experience a crash at 35 mph. On the other side of that coin, however, if you’re driving at 35 mph, the risk that you’re taking is that you might not arrive to your destination on time, and you could miss the event that you’re headed to.

MJ:

MITCH:

If your passenger in this analogy is your client, is their definition of conservative or aggressive going to match yours?

MJ:

BOB:

Now, to get to these speed limit signs and where does somebody fit – in other words, where do they feel comfortable. Do they feel comfortable driving 75 or do they feel more comfortable at 55 or 25. There’s a whole lot of questions that you ask, and there’s a theory behind these questions. It’s hard because the questions seem so similar as you are going through them. Can you tell what the theory behind all of these different questions are and how it works coming at an arrival of where their risk tolerance is?

MITCH:

So, the risk questionnaire sort of gives them two options: here’s how much you said you are willing to risk losing, and then it will attempt to, shall I say, tempt them away from that number either by offering them more reward or the same amount of reward but at less risk. It will repeat that question over and over again. Trying to make sure that they can zero in from a range to a point in order to determine what their risk tolerance is. So, if it’s able to tempt them to a higher amount of risk by offering more reward, they weren’t really that committed to their risk aversion, and that might actually surprise them when they see the dollars and cents of how much reward they could get by taking on more risk, you might find out that they are actually much more risk tolerant than they initially thought. They were only thinking about the risk before, they weren’t thinking about the long term rewards.

Conversely, if they decide to take on this same amount of reward, but they say, “Ooh, I can get that same amount of reward for less risk”, then it turns out that they may be even more risk averse than they initially thought, and they were actually only looking the potential upside that they were going for. They were more goals oriented than they were risk oriented. That could have been very dangerous for them in the long run if they had experienced more loss than they expected, and that’s dangerous for everyone involved in that relationship.

So, this particular questionnaire really zeroes in on what their true risk tolerance is and then assigns to them an objective risk number that sets the speed limit for the advisor so that they can, get this, assign a portfolio to the particular client that is measured in the exact same way and matches their speed limit without exceeding it, point for point.

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So, that’s a lot of the fear that drives it, but that’s exactly why Riskalyze was made. People will sabotage their own future based on fear. Riskalyze helps them to understand the risks of their portfolio and understand what their own risk tolerance is, and make sure that they are invested in a portfolio that they can be comfortable with for the long term. If they understand the risk they are taking on, it’s not as scary anymore, and that empowers them to stay invested even when the market has a downturn and make sure that they can achieve their goals for the long term.

BOB:

MITCH:

If a portfolio has a risk number in the 30’s or 40’s, it’s not invested as aggressively as the SEP 500 or a similar portfolio to that. It cuts down on a lot of panicked phone calls if all the sudden a market experiences a downturn, and your client calls up and says, “Oh my goodness, the market is down so many points.”

You can say, “Yes. We talked about this. I showed you the stress test. I showed you that your portfolio has a risk number in the 40’s, where the SEP 500 has a risk number in the 70’s. Lo and behold, you’re not going to miss as much money as the rest of the market. When it has another upturn, you’re going to be right back on track, having lost very little compared to the rest of the market.”

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Scenarios is rear facing, but if you look back, you can choose specific dates to see what your particular portfolio’s performance would have been during those dates. Actually, what is was during those dates and then compare that to other significant market environments. Say, if oil experienced a huge downturn, you could come up with a pretty good argument as to what your particular portfolio would do if oil tanked.

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We can assign a coefficient to show measure just how differently they move and when they move opposite of one another, that’s actually good. That actually creates, sort of, an inverse movement in your portfolio, minimizing the risk. So, you can have an extremely mathematically efficient portfolio that maximizes the reward and minimizes the risk through diversification. That yellow bar shrinks the size of the red bar, basically showing how much risk has been minimized. That red bar would have stretched all the way to the left side of the yellow bar, but now it doesn’t, which is why you can have portfolios that have significantly higher rewards than they have risks in that 95% probability range.

BOB:

MJ:

So Mitch, how does Riskalyze address or handle this emotional behavior we’ve been talking about of the individual investor?

MITCH:

BOB:

MJ:

MITCH:

It certainly is important to understand just how powerful emotions are on our decision making process, but when we understand our emotions, when we understand what we are afraid of, when we understand our fears, suddenly they don’t have as much power over us. That is what is the real magic of Riskalyze is it’s helping investors to understand what their fears are, and then to understand their investments in a way that helps them to understand the risk that they are taking on.

In the parable of the talents that Jesus talked about, we see the 10 talents and the 5 talents. Which one of the servants was the one that the master rebuked? The one who went and buried that talent.

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You know, someone with $20,000, 4% is $800, so there’s a big difference in the higher those numbers get. What I’m really seeing is that when people take this risk test, depending on how much money they have, they realize dollar amounts. That’s making a big, big difference. They truly gain an understanding of the monetary risk, not just the percentage risk, with all of the different portfolios that they can choose from ultra conservative to conservative to moderate to growth to aggressive growth. They know how that risk plays or doesn’t have to play when meeting their financial goals.

MJ:

As we wrap up today’s show, I wanted to share the advantage to managing risk this way: It allows you to stay invested, to follow your advisors advice, and avoid emotional reactions to market volatility. When we do this, investors are far more likely to achieve their long term investment goals – to buy low and sell high instead of buying high and selling low.

BOB:

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But, do you know the risk of your actual investments are and how they compare? Is it inline with what your goals are? If you would like to learn more, give Mary Jo or I a call at Christian Financial Advisors today. We’re also including a link on the Christian Financial Perspectives, our podcast website which is christianfinancialpodcast.com, so you can take the riskalize test, or you can go to our Christian Financial Advisors Website. We will have the links on both of those websites so you can take that test. We encourage those that are investors to learn what your risk number is.

That’s going to do it today on Christian Financial Perspectives as we finish up on Riskalyze.

[CONCLUSION]

That’s all for now, until next week!

[DISCLOSURES]

Asset allocation, which is driven by complex mathematical models, should not be confused with the much simpler concept of diversification. Asset allocation mitigates risk, it does not guarantee future performance. A diversified portfolio does not assure a profit or protect against loss in a declining market. All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.

Mitch Mitchell and Riskalyze are not affiliated with Christian Financial Advisors. Comments from today’s show are for informational purposes only and not to be considered investment advice or recommendations to buy or sell any company that may have been mentioned or discussed. The opinions expressed are solely those of the hosts, Bob Barber and Mary Jo Lyons. Bob and Mary Jo do not provide tax advice and encourage you to seek guidance from a tax professional.Investment advisory services offered through Christian Investment Advisors Inc. DBA Christian Financial Advisors, a registered investment advisor.