Don’t Just Stand There! Do Something! (Women’s World Cup Edition)

Yesterday the USWNT advanced to the finals of the World Cup after the heroics of Goalie Alyssa Naeher in saving a penalty kick late in the match against England.  Imagine being inside the head of a goalkeeper facing a penalty kick.  Your job is to be the last one, standing alone, against an uncontested opponent.  Now imagine your best bet, according to science, is to do nothing.  Don’t move. From a goalie’s perspective, the odds are that by standing still in the middle of the goal they have the greatest chance of blocking a shot.  This is because even when they guess correctly on which way to dive, they still only block less than 30% of the shots.

Why does the goalie not stand still all of the time? Expectations play a large part. Place yourself in the position of the raving soccer fan who watches that goalie stand still while the ball is artfully smashed into the corner of the net by the shooter.  You wouldn’t care about odds, you would look for effort from the Goalie, right? This is action bias at play. In the pivotal moment, just do something because even if it is the wrong thing, at least you tried.  Goalies try to take the information available and make informed decisions, knowing that they have to balance expectations of the crowd and team with outcomes.

This brings us to the investing parallels.  Much like a goalie having to justify action, a stock picker or market timer is constantly trying to justify their role by creating a perception of activity.  There is urge for someone to do something, anything, when we see a bit of news, or the markets are at a high (or a low).  We might be convinced that some action by ourselves or an all-knowing guru will give us the advantage and we will make more money than we would have otherwise. It just isn’t true, and that is why passive indexing has flourished, coincidentally, as science has shown us that buy and holding at a low cost (doing nothing) can improve our odds of success over trying to actively time the market. It is the investing equivalent of not diving for the sake of diving.

An important distinction here: This approach does not mean we win every time.  We can guess right, and still not have a perfect outcome.  It means we place the odds in our favor over the long term.  That’s the key to investing success.  Admittedly, staring down a penalty kick takes place in a singular moment.  The wrong choice on the world stage could be catastrophic, hence the need to make bold moves.  We don’t need to make bold moves as investors. Since we can take the long view, we are free to make good, incremental decisions that sometimes amount to doing nothing. We have the luxury of standing still, not guessing, not diving, and letting the ball come to us.

A Measure of Risk

There are two ways to measure how well you are doing in your investment account:  In percentages or in dollars.  Which feels worse: “I am down 5%” or “I am down $50,000”? For a $1,000,000 portfolio those are one and the same, but it is much more frequent that I hear down moves described in dollar terms because it feels like actual money lost.  That focus makes sense.  Percentages don’t pay the bills, dollars do.

Investor focus on dollars gained or lost brings up two very important behavioral issues:

  • All performance measures look backwards, which has limited value in making decisions about the future.
  • Measuring performance in a way that feels more painful (dollars) means investors run the risk of making emotional decisions.

What if we were able to measure our investing progress in a healthy way that helps us to make good decisions along the way? It would mean looking at more than what just happened in the markets.  We would have to take into account a topic that is harder to quantify: Risk.  In the past, investors were asked about their tolerance for risk by checking Conservative or Aggressive, or on a scale of 1-10.  The problem has been that these questions get answers that are often gut feelings and rooted in a bias toward recent events. It’s hard not to feel a little more bullish when the markets are racing ahead!

There is now a better way to quantify risk and have a positive impact on our behavior.  We use a financial technology tool called Riskalyze that has been developed to help frame our tolerance for risk in a unique way.  Here is how it works:

  • Investors complete a questionnaire based on how much they have invested, and how much they can stand to gain or lose (in dollars) over the next six months.
  • They are then asked if they are willing to trade a little more protection for the sake of higher returns.
  • By the end of the questionnaire, that willingness to trade safety for return generates a unique Risk Score on a scale of 1-100. That score will indicate a range of acceptable returns, both positive and negative over a six-month time period.
  • The investor’s portfolio is then given a score based on the risk and return profile of every stock, bond, or fund that they own.

At the end of the exercise, an investor can assess whether there is alignment between their tolerance for risk and the way they are actually invested.  Someone with a Risk Score of 30 might be surprised to know that they are invested like a 70.  The goal is to make sure we manage situations where fear or greed could emerge. If we understand what our investments could lose or gain in the short-term, we will be less likely to chase after higher returns or flee for safety at the wrong times.

Riskalyze does three things that help support better outcomes for investors.  It creates greater self-awareness by asking questions based on the numbers that matter.  Everyone’s definition of being conservative or aggressive is different and this helps to focus on how each person identifies with risk. Riskalyze also helps us to understand if an investor’s expectations and their investments are aligned.  We will never know what will happen in the future, but if we understand what could happen it will keep us from overreacting. Finally, it helps us as planners to go back to the financial plan and model the returns and risks that a client needs to take to reach their goals.

If you would like to see how it works for yourself, click here (Riskalyze) to complete the questionnaire and learn your Risk Score.

Disclosure:  Riskalyze, Inc. is a third-party unaffiliated technology company. The information presented is for general purposes only and is not meant to be construed as investment advice. This material includes the proprietary information of Riskalyze and is not warranted to be complete or accurate. Except as otherwise provided by law, neither Morton Brown nor Riskalyze shall not be responsible for any damages or losses resulting from the use of this information. For a full evaluation to determine which investments may be appropriate for you, contact Morton Brown Family Wealth, LLC, a Registered Investment Advisor with the U.S. Securities and Exchange Commission.


Reading List: Thinking in Bets, by Annie Duke

Thinking in Bets by Annie Duke.  Sometimes the stock market has been referred to as a “casino”.  As investors, then, who better to learn from than a champion poker player like Ms. Duke?  Truthfully she has written a very well-researched book on the role of skill and chance in determining any outcome.  A career at the poker table taught her that we all make decisions in gambling and life with incomplete information. Sometimes the outcomes are in our favor and sometimes not, but we need to recognize the difference between good results based on luck and bad results that can occur for even the most skilled practitioners. 

In my favorite section of the book, Duke discusses how we often fall into the trap of being 100% certain that something is either right or wrong, when frequently the odds are somewhere in the middle.  When there is nothing on the line, being that certain about anything has no consequences.  If, on the other hand, someone challenges our opinion with “Wanna bet?”, suddenly we are compelled to decide how much we are willing to wager on our beliefs.  This is very relevant to investing because with each decision we are deciding how much of our capital we are willing to commit with certainty to an outcome.  If we are honest with ourselves, we know that our skill in predication is always limited by the role of chance.  Duke contends that thinking in bets forces us to consider our biases, appreciate what we know and what we don’t, and make better decisions. 

Take it from someone whose palms sweat during penny poker, this is a book for thinkers and investors, the gambling is incidental.

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Important Disclosures

The Patience to Get Rich Slowly

Last month, Bloomberg featured a research report on why Hedge funds continue to attract investors despite lackluster performance ( Because of their complexity and secrecy, Hedge Funds have an attraction that appeals to our illusion of control.  We don’t want to believe that Read more