Tech Talk: Managing Risk in Your Portfolio

Afternoon, Chris.

Hey, George, how are you doing?

Excellent. How you doing?

I'm doing well. Thanks for asking, man.

Good, good. Hey, I appreciate you taking some time out of your schedule today to talk about what I think is an exciting topic for all investors, which is, hey, how can I be leveraging tech today? Seems like a new tool's coming out every week. But how can we be using tech to better inform our financial planning, which is a big part of what we do for clients? But I know your firm approaches that in a very specific way, really centered around, hey, how can we help investors better manage their risk and the risk they have in their portfolio.

And what I like about this format is, typically I think firms like ours talk to companies like yours, we subscribe, and ultimately we bring it to clients. But I think sometimes when that link gets broken, it's nice when the clients can hear directly from the horse's mouth on, you know, what your company's all about, you know, the culture, the why behind what you do, and really the value that you're bringing to the table. So I thought we might just start with that, you know, and get a little sense of what Nitrogen, which was formerly named Riskalyze at one point in time, what you guys are all about and, you know, the value that you're bringing.

Yeah, for sure. So kind of going origin story here a little bit, going back to our co-founders. One was a financial adviser, had his own practice, hybrid RIA and part of a BD as well, and then the other co-founder was in the financial industry. And they were having a conversation one day, and they knew each other, and they basically said, you know, the one co-founder said to the other, he said, you know, being in the financial industry, it's really interesting how the common investor thinks about risk. And the one who is the financial adviser said, you think that's interesting, you should see what ADI financial advisers think about risk and how they approach risk.

And there was this recognition there that might need to be some sort of common language that might need to be formed around helping folks understand what it is and how the approach to risk is, and to create this common language between advisor and client, and how can we understand that going forward. So really Riskalyze, and now Nitrogen, was formed around the concept of having that conversation around risk, like starting the conversation around risk there, to help folks understand, like, what might be normal performance for their portfolio, for how they expect the performance to go and how their investments decide to go.

And so we like to say, like, hey, we wanted to create a framework to help folks, the investors, to understand and react to risk appropriately, and basically say, like, hey, what could be a fearful decision, let's make those fearless decisions by understanding and setting those great expectations and making these great short-term decisions bit by bit here, so that we can become fearless long-term investors. Because it is a long-term game, but, you know, market volatility, that all happens in the short term. Yes, you should say I should be invested for the long term, but if I'm opening my mail, if I'm turning on the news, if anything that could come in front of me, that's all happening in the short term.

So we really wanted to build that framework for advisor and client to have a common language and to create that fearless investing, create those really well understood expectations of what the performance might be compared to what I feel comfortable with, and then we can move on from there in our investing journey. And again, making the client the hero and making the advisor that guide, that hero's guide that comes, think of Obi-Wan to Luke Skywalker, or Dorothy, you know, Glinda and Dorothy, right, to really guide them on their hero's journey. And like you said, George, like, technology is one of those tools that can help understand and tell that story, and again, from our perspective there, create those fearless investors.

Yeah, I think when you talk about that framework, the starting point is crucial, because a lot of people, when they put together their portfolios, they may just be doing what family and friends are doing, or what they read on Motley Fool, or even when they talk to an advisor, sometimes, you know, there's different ways to determine risk. It might just be a conversation. Historically I think has been a big way that people have done it, and especially advisers who have done this for 20 or 30 years will say, well, I lived through '08 and 2001 or even 1987, and so based upon that I can give you some tips on how you might want to structure it. But sometimes even advisers, I think they might be recommending what they think is suitable for the client and not what the client's comfortable with.

And so I know another way that people have done is using a questionnaire. And I know that Nitrogen, what we really like about it, and part of why we have it on our company website now under our resources tab, is because I think it's dynamic. I think you guys approach that questionnaire a lot different than what we've seen in the past, you know, maybe just a paper sheet that's got 10 questions on. So could you maybe speak to that questionnaire, the philosophy behind how that was built, and why that might be different than some of these historic approaches to the starting point for risk?

Yeah, absolutely, and that's a really great point too. And that's one of the reasons, kind of going back a step too, and talking about why the Risk Number. So we have this Risk Number. It goes from 1 to 99. So 1 being, like, we've just got cash and we buried it in the backyard, you know, not going to try and touch it, and it's not going anywhere, hopefully, but also it's not going anywhere, not working for us. And on the other side of the spectrum, 99, there's something with a lot of volatility attached to it, right? We might think of, like, Tesla or crypto or something like that, that's very up and down. So there's a lot of volatility that's connected to that. But basically saying, hey, there's got to be a way that we can basically create this common language, and so that's why that Risk Number was born.

And so basically to say, in our industry we have terms like conservative and moderate and aggressive, and folks are probably pretty familiar with that, right? Well, I'm a moderately conservative investor, I'm moderately, I'm aggressive. And one of the things that you pointed out as well, the adviser probably doing the best that they can and thinking, hey, I'm investing you the way that I think you should be invested, oftentimes, sometimes without thinking about it, or maybe anchoring their clients to what their personal risk tolerance is, right?

So maybe that's, if they're a little bit more pedal to the metal, well, a client might be like, whoa, whoa, whoa, whoa, hey, this is going too fast. Or if the adviser, in the case of one of our co-founders, he's like, no, I'm actually on the more, you know, conservative side of things, you know, you have my clients beginning, like, hey, why is this not going fast? Like, I want to get some more returns here. What's happening here?

So this is basically the questionnaire. Basically it was born to figure out, hey, what's your individual risk fingerprint, if you will. Everybody has their own Risk Number. Yours is probably different than mine, that's different. I'll give you an example. My wife and I went through the risk questionnaire, right? So was taking these conversations that we could say, well, you're conservative, or you're moderate, or you're aggressive. Well, George, you know, moderate or conservative means something different to you than it probably does to me, than it does to the next person that walks in the room. So how can we take these subjective phrases and can we make them a bit more quantitative? And that's where that number comes in, that Risk Number, to help folks understand that.

So basically going into, saying, hey, maybe it's based on a bucket, or maybe it's just based on your age or your investing history, we're going to say, hey, we want to take how much you have to invest, and we want to go through a series of questions here, and just say, basically, over these next series of questions, would you prefer risk to reward based on these real dollar amounts? So we're not necessarily saying percentages. Percentages are great, but really, if I can take all of my investable assets, I can put it in there.

And I'll give you an example here. We, you know, we have somebody, like, who's very rich, you know, I would say somebody who has a lot of money, and if we said, you know, here, we're going to take this questionnaire, and $10,000, you're a billionaire, but we're going to, on $10,000 right here. Well, they might be a little faster and looser with $10,000 than we are with, you know, their entire net worth. So let's make these real dollar amounts here, so you can really, you can help see and understand, would you prefer risk versus reward as we're taking you through a series of questions here.

And are you leaning to more, like, I would just like a certain, like, if I had my choice, I would just walk away with a certain guarantee of, you know, X amount of dollars? Or, given the option, I know that there's a chance for a gain, but I would also be able to stomach the other side of that coin, where there's risk there. So we just kind of want to see where you have a tendency around that spectrum through a series of questions. And it doesn't take very long. It's usually about five to 10 minutes, depending on how much time you're taking to go through there, and then we assign a Risk Number at the end of that.

So now you can see, so for me, going through that questionnaire, my, so I've been with a company, I've been with a firm for about eight years now. Just to kind of use a benchmark, the S&P 500 has been between a 74 and a 78 when I've been here. Like, that's the range it's been. I came in at a 74. Now, my wife, she took the risk questionnaire, and I'll see if you can guess her number here. She, last Christmas, got us a couple's skydiving adventure, and we're going to jump out of, apparently, a perfectly good plane, strapped to somebody that I only just met. And just to add a little bit of extra fun, she got it off of Groupon, so let's send that to the lowest bidder, by the way. And so any guesses on what my wife's Risk Number would be?

Well, I would guess if you guys went up to 100, she'd probably be pushing 100. So I'm going to get her a 99.

Yeah, close. 94.

94.

So we can see how it can, like, help frame those conversations. So I kind of knew she would put the pedal down a little bit faster than I would, but it really helps us, again, in the context of this number, see where we're at, not only as a couple but as individuals, and then help inform our journey from there.

And kind of where the rubber meets the road is saying, okay, well, if I'm a Risk Number 74, well, a 74 compared to what? And that's where we can put your portfolio, all of your underlying investments, inside of Nitrogen and generate a Risk Number for your portfolio. So are you invested with a number, just using that Risk Number as our through line to tell that story, are you invested close to what you said your risk tolerance is, what you're comfortable with, or should we make some adjustments there? There's some conversations. So it's really meant to be not only that analytical piece but that conversational piece, to help us understand where we're at and really where we need to go.

Yeah, yeah. And I think even when you have those conversations, what people were doing prior, where people say, hey, it sounds like what we're talking about, you're maybe moderate growth, let me see your portfolio, and you look at the list of investments they have, just in a sit-down meeting it's really hard to know, even as an adviser, when you're dealing with mutual funds or ETFs that have 50 to 15 different positions in them, to say, I know what's going on under the hood, and, you know, this matches up perfectly with what we're talking about. So I think getting really specific on those numbers is important. And the difference, I'm sure, as your company's seen, between a 50 and a 60 can be significant in terms of long-term returns. Even if maybe the expected return only increases a quarter point, it's good knowing, well, I have some more potential there, but here's how it increases my downside. So I think that's a crucial part of the process.

And I think it leads us to this six-month range, and I think this is one of the best features of Nitrogen. And so once people have taken the questionnaire and they get a sense of, okay, here's my Risk Number, and, you know, maybe it does match up with how their portfolio is currently invested, you know, what's the next step? You know, now that they know, okay, I'm where I need to be, how does Nitrogen help people get a sense of, you know, what are my upsides here, what are my downsides, and how do I deal with this as an investor?

Yeah, so, and I love that you brought out the six-month range there, because oftentimes, well, hey, are we looking at a year? Are we looking at three years, five years? Why six months? When I'm going through that questionnaire, right, we say, hey, think about the next six months based on your investment amount here. If you were to lose this much, would you stay, basically, it's kind of like, would you stay uninvested, or would you say, hey, no, timeout, George, you're getting a phone call from me, because this roller coaster is getting too twisty, you know, I can't hang here.

And then looking at the six-month time frame of a portfolio, and we did a bunch of research around that, basically, of why six months. And basically it's a period of time that we found clients can easy relate to, to make sure that, hey, I can, six months ago, I've got a pretty strong connection to six months ago. About a year ago, my Facebook feed kind of reminds me what was happening a year ago, but about in that six-month time period, I have a connection with that, and I can remember, hey, I've got that.

And so when we're thinking about six months, how are we giving those quick wins? I use the movie What About Bob? I'm not sure if you've seen that. Bill Murray's in there, and he's basically going, and he's really scared to go out in the world, and he works with a therapist, and the therapist says, you know, baby steps, baby steps. So how are we creating these short-term wins to make sure that we're staying invested for the long term? So through a lot of our research, that six-month time frame really helps us kind of hone in and zone on, and it also helps us create a tighter probability time frame for that portfolio.

Just to say, hey, you know, in the next six months, if your portfolio was down this much and it could be up this much. I don't think we're going to be having a difficult phone conversation if, you know, the portfolio is up on the upside. But if over the next six months, you know, your portfolio was down 10%, or this dollar amount, right, we would expect that to be normal performance. Because we say, well, you know, it's expected an 8% return. Well, that might be over the long term of the life of that portfolio, right?

But if you say, you know, George, you're my advisor, you say, yeah, we're expecting about an 8% return on this portfolio, and, you know, we come back six months, a year from now for review, and I'm down 4%, I'm like, George, wait a minute, whoa, whoa, you told me I was going to be up 8%. What are you talking about? And so that's where we're creating that six-month range, that 95% historical range, to say, hey, we would expect your portfolio to land between down here and up here, and that would be performance. So wherever we are in that range, that's setting some really great expectations that you understand for your portfolio.

Yes, the market is going to go up. Yes, the market is going to go down. But basically say, you know, how far, this is kind of our definition of risk tolerance, is how far can a portfolio fall within a fixed period of time before the investor will capitulate and make a fear-driven investing decision. So that's where we really want to start to put those time frames around that six months, again, to get those short-term wins to make sure that we're staying invested for the long term.

Yeah, no, and I think people think about returns on an annual basis, but they're really making decisions with their investments usually on, like, a three- to six-month basis is probably more accurate. And what I think is also great about that range, it just gives a good visual. And I think inside of Nitrogen you can run proposed portfolios where you can kind of fine-tune that to say, hey, what allocation changes would we need to make, you know, we add this fund, we take out this fund, in order to maybe tighten up the screws a little bit. And if we've got a 12% downside and we're trying to get to 10, how much more bond exposure do we need to take on, or how much more cash do we need to put in the portfolio to get there? And so I think it's a great thing to be able to play around with.

And I think it leads me to my other favorite thing about Nitrogen, is the idea of these stress tests that you guys have. Because I feel like one of the questions we as advisers get the most, not only from people that lived through it, but even younger investors that are worried that they didn't live through it, so they're not sure how they're going to handle it, is the Great Financial Crisis, and the question of, if things were to get bad, how bad could things get with my portfolio? And I think Nitrogen's made a really good attempt at putting numbers to that question.

And so to your point earlier about, it takes all the history from the investments, not only they have in your portfolio, but you've got a database of basically every investment out there, it seems. You can look at these scenarios of, okay, how would your type of portfolio that you have currently performed during 2008, or 2001, or even the bull market of 2013? And so it can, I think it can really give people a sense of, hey, if it were to happen tomorrow exactly how it happened 16 years ago, here's what we could expect, how it would perform. And so, yeah, maybe, I don't know if you have any more comments on that, but I just want to highlight that as a really great feature of the portal.

Well, one, it's kind of crazy to think 2007, 2008 was about 16 years ago, so that's just kind of blowing my mind right there. But yeah, one of the superpowers, I'm a little bit biased here, but one of the superpowers, I think, of Nitrogen is to take some of these concepts and make them very easily digestible and visible. And we were talking about setting expectations with our clients, with investors, just to say, hey, we know that markets go up and we know that markets go down, so what I want to take you through is this stress test.

So we could take a look at your portfolio, how you're invested now, and again, we're using that Risk Number as the context, as a through line for this story here, and just say, hey, if your portfolio, let's say, is a 63, and, you know, what would it look like if we were to see 2008 again, 2009? What if we were to see, you know, 2013 pop up again? We have different scenarios of points in time there. We could say, here's what we would expect your portfolio to look like. Now, we don't have a crystal ball, but based on data, based on all of this information that we have coming in, this is how we would expect your portfolio. An interest rate spike, how would that look? How would your portfolio look compared to this?

So again, it's setting really great expectations, so that I know that I'm educated, that I have information to say, oh, okay, well, you know, and again, using that Risk Number, you know, saying the S&P is going to be, let's say, a 74 to 78, let's just say it's a 75, I know that a 63 is never going to beat a 74, probably. So my neighbor comes over to me and says, oh my gosh, I'm getting all these returns, this is really great, blah, blah, blah. Well, I've had so many advisers say, well, I've had, you know, clients call me up and say, well, look, they're getting all of these things right here.

And the adviser can say, yeah, that's true, and we could do that for you, but do you remember when we went through that questionnaire? Do you remember when we talked about it, when we looked at your portfolio? This is what you said you were comfortable with. So you can be a 75, a 78, whatever, but just know that there's two sides to that coin, and that stress test really helps to tell that story. And I've talked to several of our folks that just say, hey, when I use stress tests with my folks, again, that helps them understand, and when the market gets volatile, my phone does not ring nearly as much as it used to, because we understand what would be normal and what would be typical performance during these volatility times.

Yeah, yeah. And I think that leads me into just my last question about, as, you know, risk is not a set-it-and-forget-it type issue, and it evolves and it changes over time, particularly for people that maybe have used a certain strategy over a long period of time. You know, if people who got heavily invested, you know, after 2008, and we've seen this incredible bull market, that maybe started off as a risk 60, now we've seen these returns go up and up and up, which they may have just organically grown now to a 70. Nitrogen has this check-in feature, so I was just wondering if you could chat about that. And again, it's a quarterly notice that goes out, I believe, and I believe there might even be a monthly option as well. But again, why that cadence? Why do you guys think that was appropriate? And maybe just speak to some of the features behind that.

Yeah, that's a really great question. You're absolutely right, it's just not a set-it-and-forget-it. It's something where, again, volatility happens in the short term. So, you know, if we can see a theme coming through here, it's not just that we turn our brains off. Maybe we meet once a year and then we turn our brains off, and then, like, well, I'm not going to think about this again until we meet again next year. So we developed check-ins as a way for the advisor and for the client to stay in that conversation between those review meetings.

So yeah, we can set it to go out quarterly. It can go out monthly. Actually, we could even do it once every six months. So just depending on the cadence there of what it looks like, to just say, hey, I'm just going to check in with you, and just, how are you feeling? Two questions. It's real simple, two questions: how you feeling about the market, and how are you feeling about your financial future? So this can be just any sort of indicator, just to say, you know what, actually I'm doing okay, things are feeling good. Or, you know what, I'm feeling a little bit nervous right now, and I'm just going to indicate that right now.

And that can be, you know, a signal for us to get on a phone call, to get on a Zoom call, to whatever we need to do, just to make sure that we're setting expectations, that there's questions that are coming up for you in the meantime. Again, in the short term, it's a way to continue on that conversation. And as your adviser, when I send out those check-ins, I've got a history now. I can see how we're trending here, and if that's something that I need to bring up at our next review meeting.

You know, with just here in just a job, I check in with my manager every week, and, you know, she can see trends and how it's going. So it's a lot of information that we can make sure that we're staying on top of your financial journey, on top of your financial health. And, I mean, I just think it just adds to better communication, and in a relationship, I think communication is key. And that's one of the things that we can make sure that we're keeping that conversation going, even when we're outside of those review meetings.

Yeah, absolutely. And I feel like it probably is a conversation that clients like automated, in a sense. They probably don't want us calling them every quarter saying, how you feeling, everything okay? You know, and sometimes, to your point, I think what's great about it is, even in great markets, I think, like you said at the beginning, sometimes advisers anchor their preconceived notions about, well, you know, we've had a really solid two years. Well, it's an election year. Even though the market's doing really, really well, there may be a batch of clients that are just saying, you know what, I don't really care then I'm up, you know, 10% or 15% this year, I'm just nervous about the state of things.

And so they can indicate that with a few clicks, and it really is a trigger for the advisor to say, you know what, it's a good time to have a conversation. I wouldn't have thought that, sitting in my desk, that that's the way that you were feeling. But it's a good way to keep that conversation going throughout the year, you know, without having to get on the horn, letting you be able to do it in a way that's efficient for you as an investor.

For sure, and for you, the adviser, again, building out that relationship, with, like, hey, I know this individual, and I know that right now it might be a little nerve-wracking for them, right? And so I'm going to go, you know, there's an option to send it manually, so I'm just going to check in with him right now and just say. So it's just a way just to do that little bit of extra touch and just say, hey, I just want to make sure that we're staying in touch and communication. Because, yeah, it, you know, I don't think we can, there's, I mean, you can try to avoid the news as much as you can, but, you know, we're kind of bombarded with it every day. And so just a really great way, really, really great tool, in my opinion, to keep those conversations going.

Awesome, awesome. Well, Chris, I really appreciate your time today, and, yeah, I think this will be very beneficial to our clients, or, you know, just any investors that see this video. And so just as a reminder to our client base, you probably maybe had heard about this when we had launched it a year ago, but just a reminder, it's a great tool. We continue to use it with our clients, and if you want to have a conversation with your adviser here at the office, we'd love to have you in to talk about it or review it. And, yeah, I honestly, you know, I'm not just saying this to say it, it's really been changed the way that we've look at risk, and we appreciate the job that your firm is doing and the additional features that you can continue to tack on to the tool as the years go on.

I appreciate it, and love helping, partnering with you guys, and creating those fearless investors. Thanks for the opportunity.

Thanks, Chris. I appreciate your time. Be back.

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