Isn’t It Time We Made Investing a Rich Experience?

Investing is a funny business.  Whether you invest on your own or you use an advisor, if you own stocks or bonds, you’ve probably had to answer a few questions about your investment style.  Questions, such as “Which portfolio would you choose?” and “How much do you know about investing?” These questions are intended to measure your risk, and, correspondingly, put you in the best portfolio for the amount of risk you are willing to take.

While well intended, this approach is a ridiculous way to drive investment decisions, particularly given the technology available today. 

Let’s consider my favorite question (as in, the one I think is most useless): “What would you do if the stock market dropped 25%?”  This – or some version of it – is a stalwart of nearly every risk questionnaire (such as here and here).  It has multiple problems.  First, why did the market fall 25%?  Earnings?  Terrorist attack?  These things matter to me as an investor.  Second, this is a hard question to hypothesize on.  Considering how I’d react – without having actually lost 25% – could yield to very different outcomes than what I would do in the real event.  Lucarelli, et. all wrote of this phenomenon.  

For arguments sake, assume for a moment that this is a valid question, and I answer it by saying I would sell all of my stock and run for the hills.  That would suggest I’m not very risk tolerant, and my portfolio should be skewed toward shorter dated Treasuries that deliver a healthy 1% return in the current market.  Now, assume I want to retire in 10 years, have saved $500,000 and need $700,000 to stop working.  That’s a compounded return of 3.42%.  Do I follow my risk tolerance, thereby guaranteeing I won’t reach my goal?

The inherent flaw in a risk-based approach to choosing your investments is that it ignores the very reason for which one invests: goals.  Why am I foregoing consumption today for consumption in the future?  Because I need money in the future for something – retirement, college tuition, etc.  Shouldn’t the likelihood of reaching my goal(s) underpin my investment decisions?

Technology has the ability to dramatically transform investing.  Imagine a scenario where I can define my goals – more than one – and observe the likelihood of reaching each one with different portfolios.  Perhaps by being conservative, I have a 95% chance of sending my kids to college, but near certainty I’ll be dining on cat food in my twilight years.  Being aggressive means the likelihood of affording college drops to 75%, but I have a good shot at leaving the cat food for the cats.  Technology can give me this information in real-time, and let me make informed decisions about where I invest my money.  This includes showing me progress toward my goals, and showing me scenario analysis of how saving (investing) more or less impacts my objectives.

We spend a considerable amount of time in tech talking about how to deliver rich experiences to our customers.  “Rich” is anchored by context.  Isn’t it time we made investing a rich experience (pun intended), and incorporated goals into our decisioning?  Let’s support our investment choices through real, contextual outcomes that matter to us, not questions that read more like ‘cover-your-ass’ than helpful insights.


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2 thoughts on “Isn’t It Time We Made Investing a Rich Experience?

  1. Haha, I know that questionnaire you’re talking about. Right, whom does it benefit — definitely more CYA than anything else. Who needs that!

  2. Thank you for your creativity.

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