This morning, the New York Times had a great piece discussing the ideas in Daniel Kahneman’s book, Thinking Fast and Slow. It aligns perfectly with the Riskalyze viewpoint on investing.
Most behavioral finance experts counsel that for the majority of people, a passive investment approach is the wisest. Devise a portfolio that measures and limits the amount of risk you can afford to take, align it to your specific goals — college financing, retirement, estate building — and leave it alone. Professor Statman recommends low-cost index funds. “I just let them ride,” he said.
The challenge for average investors is figuring out how to do that, and that’s exactly the problem we’re working to solve with Riskalyze. We’re the only investment tool today that allows you to quantify your risk and align your portfolio to those specific goals with science, rather than arbitrary guesses.
If you wanted to follow Professor Kahneman and Professor Statman’s advice, you’d use Riskalyze to build a portfolio with stocks, bonds, inflation-protected treasuries, commodities, real estate and precious metals. Here’s how my Riskalyze portfolio looks with low-cost ETFs representing each of those asset classes. (I’m fairly risk averse; your portfolio will vary.)
Personalize that portfolio with your unique risk fingerprint, and you’ll have that simple, diversified set of investments that you can ride for the long term, rebalancing every two or three months as your risk tolerance and investment values change.
Aaron Klein is the CEO of Riskalyze, a technology company that is reinventing the way the world makes risk/reward decisions. To learn more about Riskalyze, visit Riskalyze.com.