Are you measuring portfolio risk effectively with Aaron Klein

Aaron Klein: All the data says if we keep clients invested for the long run they are going to do better than if they pop in, pop out, risk on, risk off in a random way.
Aaron Klein: All the data says if we keep clients invested for the long run they are going to do better than if they pop in, pop out, risk on, risk off in a random way.

Can you get a true understanding of a client’s risk tolerance and place them in a portfolio with the appropriate portfolio risk by asking a few simple subjective questions? Robo Advisors Betterment (see my interview with Betterment founder Jon Stein) and Wealthfront believe they can but today’s guest, Aaron Klein, co-founder of Riskalyze, believes those firms have it all wrong.

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Aaron’s firm tackles the risk tolerance and portfolio risk challenge from a different angle by utilizing concepts borrowed from Prospect Theory. Prospect Theory was developed by Daniel Kahneman and Amos Tversky and essentially says, “People value gains and losses differently and, as such, will base decisions on perceived gains rather than perceived losses. Thus, if a person were given two equal choices, one expressed in terms of possible gains and the other in possible losses, people would choose the former.” Source.

(Want to read the full Transcript of my conversation with Aaron? See below.)

We had a fascinating discussion about how investors deal with portfolio risk and we capped it off with some thoughts about the future of the financial advice business. Aaron has strong opinions and he has the smarts to back them up. Don’t miss this episode with Aaron Klein of Riskalyze.

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Aaron Klein on Riskalyze…

Our mission is aligning the worlds investments to fit each investor’s risk number. We really believe that every investor has this risk number, and if they can invest in alignment with how much risk they personally can handle, that allows them to be a fearless investor. A fearless investor is a way better client for an advisor. That’s really the principle that our company was founded on.

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Steve is the founder of Belay Advisor and a NYT bestselling author, podcast host, speaker, and financial advisor coach.

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