Behavioral Finance

What is Riskalyze and Its Mission?

May 11, 2022 by Hans Blake, CFA, CPA

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On today’s Intelligent Money Minute, we welcome Aaron Klein the CEO of Riskalyze. During this episode, Aaron explains how his company Riskalyze came to be, and what’s Riskalyze mission for investors and financial advisors. Riskalyze’s mission is to empower the world to invest fearlessly. It’s a very investor-focused mission, but the truth is everything Riskalyze does is through the lens of helping the financial help the end investor. Our psychology often sabotages us when investing. Riskalyze seeks to transform those sabotaged investors into fearless investors with the help of a qualified financial advisor.

Some innate investment behaviors are unavoidable. However, we want to help our clients harness their harmful emotional behaviors, including that mother of all behavioral finance biases- confirmation bias. At Intelligent Investing, if we can help empower you to invest fearlessly, we’d be honored to have a confidential call or coffee with you.

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As Aaron mentioned, we want to transform fearful investors who make bad decisions into fearless investors who make great decisions, and over time improve their financial picture. To learn more about our philosophy, be sure to subscribe to our podcasts so you can stay informed.

Aaron Klein Bio

Aaron Klein is co-founder and CEO at Riskalyze, the company that invented the Risk Number® and empowers the world to invest fearlessly. The company is headquartered in Auburn, California, and serves tens of thousands of financial advisors.

He is husband to Cacey Steward Klein, dad to Spencer (born in South Korea), and Emma and Teddy (born in Ethiopia). Aaron and Cacey cofounded Hope Takes Root, an initiative to use vocational training and life mentoring to change the future for orphans and at-risk kids in Ethiopia. He also sits on the board of Invest in Others.

Who is Aaron Klein of Riskalyze

April 27, 2022 by Hans Blake, CFA, CPA

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On today’s Intelligent Money Minute, we welcome Aaron Klein the CEO of Riskalyze. Riskalyze is an investment risk software that powers the world’s first risk alignment platform that is built on top of a Nobel-prize-winning academic framework. During this episode, Aaron goes back to the beginnings of Riskalyze, and how he got inspired to create his risk analysis software.

At Intelligent Investing, our firm was built on the belief that improving investor behavior is crucial to long-term success. Unfortunately, we live in a society that has made almost a secular religion out of “investment outperformance,” and the average investor tends to misbehave and doesn’t just merely underperform the markets– they often underperform their own investments! The reason the average investor blows upwards of 60% of the return of the average fund over any given 20-year period is that he behaved inappropriately.

Aaron Klein Bio

Recency Bias- Why We Often Sabotage Our Portfolios

April 14, 2022 by Hans Blake, CFA, CPA

If I were to ask you to name 10 restaurants, chances are you would name 10 restaurants you’ve eaten at recently. You likely wouldn’t name restaurants you’ve eaten at say 1-2 years ago that you no longer patronize. When it comes to the business world, managers tend to give more importance to the past 3 months of work done by their employees rather than their performance over the past year. Why is this?

What Is Recency Bias?

Recency bias is our tendency as humans to give more weight to recent events than we should and project those events into our future. It is a very common psychological tendency in humans. In fact, the BeFi Barometer 2021 study, conducted by Cerulli Associates and sponsored by Schwab Asset Management in collaboration with the Investments & Wealth Institute, found that recency bias is the most common behavior bias that advisors believe is affecting clients’ investment decisions. It ranks as the number-one bias for every generation—and is one place Millennials and the Silent Generation find common ground.

Recency Bias in Investing

Recency bias is very common in investing; investors tend to give more importance to short term performance compared to long term performance. For example, an investor invests $100,000 in a mutual fund. Over 5 years the market value of his investment grows to $175,000. Then in the last three months, the value falls to $150,000. The investor may look at his investment performance of as a loss of $25,000 in 3 months and not an overall profit of $50,000 in 5 years. This is recency bias.

Investors often stay away from asset classes when markets have fallen sharply when on the contrary, they should consider rebalancing and investing back into the asset class because they may be buying further at attractive prices. Recency bias clouds our judgment and is detrimental to our financial interests in the long term. We should recognize our tendency to have recency bias and look for ways to mitigate it.

Recency Bias with Inflation

According to the Associated Press, inflation recently hit a new 40-year high, jumping 7.9 percent over past year. As we see our gas pumps increase higher than we can remember and our grocery and restaurant bills skyrocket, it is easy to think that inflation is here to stay. It’s hard for us to think down the road a couple of years and envision inflation coming down from recent highs. The difficulty once again stems from our recency bias.

Why Fight Recency Bias

There are several steps you can take to fight off your own tendency to reflect on recent adverse events and not overweight them in your future. If you are a long-term investor, you need to get comfortable with the concept that you can and will lose money in certain market environments.

If you are nearing retirement, you may want to consider taking less risk with your overall asset allocation. It doesn’t mean you should panic sell stocks when they are down. Unless you already have sufficient money for all you will need in retirement, you’ll likely need to generate some growth in the coming years. That can’t be achieved by going all to cash.

Your goals, the money you need for your goals, and your time horizon are what matters. At Intelligent Investing, we use Intelligrations™ that integrate our clients’ financial goals with their risk tolerance and portfolio in real time.

How to Fight Recency Bias

Here are a few suggestions on ways to fight recency bias:

Get an accurate picture of your financial goals, your balance sheet, and your income statement. This will help you stay calm when things seem out of hand.
Set accurate expectations and assumptions when building your financial plan. Don’t just use recent events and market conditions.
Stress test your portfolio using different potential environments your portfolio may go through.
Consider professional help and accountability from a fiduciary advisor. You need to find a professional who is always in your corner and is legally obligated to always act in your best interest.

Keeping recency bias out of your thoughts and portfolio can be very difficult–but not impossible. With the right tools and right financial accountability partner, you can fight your own thoughts that try to sabotage your hard-earned nest egg.

If you’d like to become a client of Intelligent Investing, please click here to call or schedule a “discovery” meeting.

Sticking to the Plan & Avoiding Behavioral Finance Mistakes

April 29, 2021 by Hans Blake, CFA, CPA

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On this episode of Intelligent Money Minute, we interview Matt Hougan, Chairman of Inside ETFs on sticking to the plan in the midst of fear. Despite being the founder of ETFs.com, Matt isn’t unlike other investors in regards to portfolio concerns. Matt says it himself that he worries about the same things that a lot of people worry about. During this episode, he mentions the 4o year-long bond bull market and equity evaluations as personal concerns. Despite these concerns, Matt stresses the importance of sticking to a long-term investment strategy in the midst of fear. One thing will remain, the potential that humans will misbehave. That’s why it’s critical to not be fearful or greedy in finance.

When we meet with prospective clients, one of the first steps we take is to have prospects take a state-of-the-art risk questionnaire. Our approach uses a Risk Number built upon a Nobel Prize-winning framework, and every client receives a unique risk number. The risk number is a way to understand your willingness to take on risk. We also will discuss your ability to take on risk, your need for risk, and explore what your current portfolio risk is. We’d be happy to setup a complimentary call or meeting. You can book a call or meeting by clicking “Get Started.”

Matt Hougan Bio

Matt Hougan is one of the world’s leading experts on crypto, ETFs, and financial technology. He is Global Head of Research for Bitwise Asset Management, creator of the world’s first cryptocurrency index fund. Hougan is also Chairman of Inside ETFs, the world’s largest ETF conference. He was previously CEO of ETF.com, where he helped build the world’s first ETF data and analytics system. Hougan is co-author of the CFA Institute’s Monograph on ETFs. He’s also a crypto columnist for Forbes, and a three-time member of the Barron’s ETF Roundtable. For more resources from Matt Hougan click here.

The Four Horsemen of the Retirement Apocalypse

April 15, 2021 by Hans Blake, CFA, CPA

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On today’s Intelligent Money Minute, we interview Larry Swedroe on the four horsemen of the retirement apocalypse. Larry explains the importance of investors not using historical returns for blindly forecasting the future. On the contrary, Larry explains the need to understand how the returns earned value. During the episode, he goes through misconceptions about equity evaluations, optimistic forecasting, and bond yields. Larry explains in detail the four horsemen of the retirement apocalypse:

Equity evaluations are much higher
Bond yields are lower
Longevity risk
Long-term care risk

As Larry mentioned, the Four Horsemen of the Retirement Apocalypse can seem scary and produce fear in your hearts. As you approach or if you are in retirement, there are some ways to plan for such events. At Intelligent Investing, we minimize financial stress to maximize lives. Our goal is to create a written financial plan and stress test your plan and portfolio for these types of events. We’d love to sit down with you over a complimentary coffee or virtual meeting to discuss how we may serve you and your family. Don’t face retirement alone…let us be your financial accountability partner and we can face the future together.

Schedule a short discovery call or meeting

We’ll be interviewing Larry on several podcasts regarding markets, passive investing, and diversification, so be sure to subscribe to our Intelligent Money Minute podcasts.

Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “The Only Guide to a Winning Investment Strategy You’ll Ever Need.” He has since authored seven more books.

Larry Swedroe Bio

Since joining the Buckingham Strategic Wealth in 1996, Chief Research Officer Larry Swedroe has spent his time and energy educating investors on the benefits of evidence-based investing.

In his role as chief research officer and as a member of the firm’s Investment Policy Committee and Board of Directors, Larry regularly reviews the findings published in dozens of peer-reviewed financial journals, evaluates the outcomes and uses the result to inform the firm’s formal investment strategy recommendations.

Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television shows airing on NBC, CNBC, CNN and Bloomberg Personal Finance. Larry is a prolific writer, contributing regularly to multiple outlets, including Advisor Perspectives and ETF.com.

Before joining Buckingham, Larry was vice chairman of Prudential Home Mortgage and senior vice president at Citicorp.

Larry holds an MBA in finance and investment from NYU and a bachelor’s degree in finance from Baruch College.

The 3 Solutions to the Biggest Financial Problems HENRYs Face

April 7, 2021 by Hans Blake, CFA, CPA

Reading Time: 3 minutes

First of all, nobody likes to be labeled, and there are always exceptions to the rule, but HENRY is an acronym that stands for High Earner Not Rich Yet (coined by Fortune in 2003). HENRYs are young doctors, lawyers, engineers, or other top-earning professionals who have a high salary but don’t have time to manage investments. They are in the process or have finished paying off student loans and are beginning to accumulate a nest egg. They may have a young family and are becoming an expert in their professional field. Essentially HENRYs are young professionals who have a high salary but don’t have time to manage investments.

A couple of quick stats: Many HENRYs are Millennials who like control and technology, and make up the largest generation. They have the highest number of billionaires and are digital do-it-yourselfers. 25% aren’t sure how their retirement savings are invested, and 80% are concerned Social Security won’t be there for them when they retire.

People make money in many ways, but often don’t know what to do with it after they’ve made it. In a prior blog, we wrote about some of the biggest financial problems a HENRY faces: The 4 Ds. To quickly summarize, they are: Debt, Direction, Discipline, and Digital Dangers

Sometimes HENRYs fool themselves into thinking they can just “Google” their financial or investment questions. Unfortunately, it’s not that easy. Market conditions and economic forecasts change constantly. Technology can beat humans at computations, but I also believe it is best to receive wisdom from a human who understands investor behavior and who leverages integrated technologies.

So, now that we’ve covered some of the biggest financial problems a HENRY faces, How do we overcome them? Three Ps

Have a Plan, Be Patient, and Form a Financial Partnership

First, Have a written plan

Only 30% of Americans have a long-term financial plan. “If you don’t have a plan, you’ll be part of someone else’s.” Terrence McKenna
Start by writing out your long-term goals (5-10 year). Then, write out the big stepping stones (say, your 1-year goals) that will help you get there. Then write out the action steps to get you to those stepping stones. (breaking it down into quarters, months, and even weeks)
Remember, “A goal without a plan is just a wish.”

Second, Be Patient

Warren Buffett’s favorite holding period — forever — has few fans these days.
The length of time that investors hold shares has been shrinking for decades but the trend has been exacerbated due to COVID-19. People have too much time on their hands, they have been given stimulus checks and told to stay at home. This is a recipe for disaster, and has caused people to become nervous about sitting on investments for too long. The average length of time shares spend in a portfolio hitting record lows this year as investors surf wild market swings for quick gains.

Third, form a financial partnership

I often see young professionals partner with an inexperienced or wrong advisor. Perhaps they use a buddy they went to school with who took a 40 hour class that taught them how to sell a certain financial product such as whole life insurance. So, Be sure to check his or her credentials.
Be sure to understand the financial advisor’s conflicts of interest. Many times brokers make money based off of transactions, so they are motivated for you to buy and sell, which can cause unnecessary expenses in your portfolio.
There are many good financial advisors out there, and our firm, Intelligent Investing is a fee-only independent fiduciary firm. A fiduciary means we must do what is best for our clients at all times and strive to put you into a portfolio that matches your willingness to take on risk. Perhaps look for an advisor who does not sell any financial products such as insurance or annuities, and is incentivized to have your portfolio grow. Fear and Greed are everyone’s two biggest enemies when it comes to money, so ideally, look for a financial partner, who can provide a trustworthy lifelong human relationship and financial accountability.

Many HENRYs and millennials agonize over making decisions–such as choosing a financial advisor. However, they ignore the opportunity cost of our time. For instance, if you spend months thinking about whether to make a career change, you will have lost time that you could have spent actually building your new career. Instead, set a time limit for any decision you face and consider outsourcing to other professionals who are experts in their respective fields. You may enjoy running the numbers, but you need a financial accountability partner as a second pair of eyes to ensure you are on track.

How to Get Started with Cryptocurrency

April 1, 2021 by Hans Blake, CFA, CPA

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We asked Matt how someone new to investing can get started with cryptocurrency. Matt explains that strict guide rails are critical to cryptocurrency. He stresses don’t overdo it because cryptocurrency is a highly volatile investment. Even a small amount of crypto can have a dramatic impact on a portfolio. Second, never put all the proverbial eggs in one basket. Matt suggests that an appropriate crypto index fund or even spreading the investment among the top-performing assets may be right for certain investors. Finally, it matters who you partner with within the crypto space.

At Intelligent Investing, we believe in Diversification– the spreading of risk and reward across various factors and asset classes. Matt highlighted several risks with investing in cryptocurrency and reasons why it should be a very small minority of your portfolio if you decide to include it in your portfolio.

This podcast is not a recommendation to buy or not to buy cryptocurrency. Before you ever invest in anything, you should perform lots of due diligence and research, especially if the investment is relatively new. You should also consider how investing impacts your overall risk and financial plan. Remember, if you never own enough of any one thing to make a killing in it, then you probably won’t have to worry about owning so much of that thing, that you get killed by it.

Matt Hougan Bio

Intelligent Investing’s Perspective on Bitcoin

March 11, 2021 by Hans Blake, CFA, CPA

Reading Time: 5 minutes

Bitcoin has soared in recent months, smashing through its 2017 highs and new territory for the first time in three years. The bitcoin price hit around $42,000 per bitcoin in January 2021, up around 300% since early October 2020. At the time of this writing, the cryptocurrency is up around 40% YTD and its blistering bull run has attracted attention, not only from millennial retail investors but also from institutional investors, who view it as a potential safe-haven asset akin to gold.

In December 2017, the search term “bitcoin” reached a peak according to Google Trends, but recently, there has been a renewed interest in the cryptocurrency. There have been numerous articles, news stories, and documentaries on the topic, but as with everything else, it is sometimes difficult to determine what the ulterior motive of the source is. Most of the articles that promote bitcoin have either a “get rich quick scheme” or “doomsday is approaching” mentality. We don’t believe that living on the edge of greed or fear is healthy.

Is bitcoin the latest Fad or Bubble?

Let us first preface this article with humility and let you know that although we have interviewed experts in this field on our podcasts, we do not consider ourselves experts on cryptocurrency (such as bitcoin). Our job is to be the buffer between headlines, your emotions, and your portfolio, so we offer our humble opinion on bitcoin, based on our research.

Every so often, there comes a “new” product that is touted as the “next big thing.” There have been periods of history where tulip bulbs and things ending in “.com” were fetching headline news and investment dollars, only to find out they were fads or bubbles. History will prove whether bitcoin will join such speculative ranks.

Regarding bitcoin as an inflation hedge

The idea of bitcoin as a hedge against inflation has continued to gain traction among investors, amid unprecedented stimulus from governments around the world to tackle the coronavirus crisis. Some analysts have argued such action could lead to a spike in inflation. It is true that last year the U.S. government passed a lot of legislation to provide stimulus to individuals and companies to mitigate a wide-spread economic depression.

With U.S. federal debt at 100.1% of GDP, the highest since World War II and rising, investors often wonder what the breaking point could be of mounting U.S. debt. The critical consideration to examine is not actually the level of debt or the ratio of debt to GDP, but rather the cost of servicing the debt.

Our national debt is soaring, but the interest rate paid on that debt has come down sharply in recent decades. Interest rates have come down for a number of reasons, but partly due to the Federal Reserve holding rates low, and forecasting that they will keep the Federal Funds rate low in the near term. This has made debt more affordable, and in the near term should be sustainable.

The national debt stands in for virtually all the evergreen doomsday scenarios we encounter. They’re all premised on extrapolation–and on the idea that Armageddon when it finally comes, will give no warning. Both suppositions are highly improbable, and there’s no way to make rational investment policy out of either, much less both.

Remember, that policy, not politics, is what matters most for portfolio construction. Besides, if inflation is one’s fear, what has ever been a more efficient long-term inflation killer than mainstream equities?

Some Concerns about bitcoin

The definition of currency is “a system of money in general use in a particular country.” Our first concern we have is that bitcoin is not backed by assets or even the full faith and credit of any government or widely-trusted agency the same way traditional currencies are. Based on the definition of a currency, one could argue that at this time, it isn’t one.

Bitcoin offers anonymity and freedom from regulation, which allows it the opportunity to engage in illegal activity from drug and sex trafficking to child porn. This is a huge red flag for us, and a primary reason we do not encourage direct investments in bitcoin.

One of the reasons why bitcoin has gone up in value recently has to do with its limited supply. When Satoshi Nakamoto (the name used by the presumed pseudonymous person or persons who created the concept of bitcoin) invented the code for bitcoin, he limited the supply of bitcoins to be mined to be 21 million. So far, around 19 million have been mined, but the remaining 2 million or so will take until the year 2140 to be mined as the reward for mining bitcoin effectively lowers bitcoin’s inflation rate in half every four years. The reward for mining bitcoin will continue to halve every four years until the final bitcoin has been mined.

However, the lack of regulation means that it is possible the bitcoin network protocol could be changed between now and 2140. Furthermore, any increase in supply can have devastating effects on the value of each bitcoin, and even a whiff of this potential can be enough to scare market participants into a selloff. For example, if Satoshi Nakamoto who has been off the grid for about 10 years dumps his portion of bitcoin (1 million or 5% of bitcoins in circulation) on the markets, there could be a massive crash in bitcoin.

What About Blockchain Technology?

We do find the topic of blockchain technology extremely interesting. We think there are promising uses for this technology in our financial and money markets, but we seem to be quite a ways from that, and it is unclear who the beneficiaries might be and what opportunities may result from these technologies.

Fear of Missing Out

“Better three hours too soon than a minute too late” is a line from a nearly 400-year Shakespeare play, The Merry Wives of Windsor. Unfortunately, business history and market history is filled with stories that prove this old adage wrong. For example, you are likely carrying an iPhone or Android phone instead of a Palm Treo these days, and updating the world on Facebook instead of LiveJournal.

Just because bitcoin has been the most well‐known use of blockchain to date, that does not mean it will endure or become the most successful. Like any other industry, innovation improves productivity for its adopters, weeding out the weak or slow. Market prices tend to reflect investors’ collective opinion on who stands to gain, and it isn’t always the first-to-market. Therefore, it is nearly impossible to know how to invest on a given idea without specific insider information or speculation.

Because it is nearly impossible to model or even rationalize a potential outcome, we recommend steering clear of bitcoin-related investments that you are unwilling or unable to lose.

We humbly recognize that this can turn out to be the naïve or cynical view, but we are willing to be wrong in this case. Intelligent Investing believes in broadly diversifying and prudently allocating investment dollars into economically-viable enterprises whose expected profits are derived in understandable ways, and not based on prediction, speculation, or hype. In our opinion, we believe bitcoin resembles the latter at this point in time.

Intelligent Investing looks forward to revising this position as new information becomes available.