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Can you sleep at night…?

I wanted this to be a quick post on “risk” – a word that undoubtedly has been thrown around a lot in the investment world but somehow still has no tangible meaning associated with it. Why is risk so important? Risk is essentially *the* determinant of what your investment portfolio should look like: the level of risk you are willing to take on determines the return on your investments. The relationship between risk and return can be summed up in 5 words: higher risk implies higher returns.

This post has been somewhat been inspired by Vanguard’s article on “the truth about risk” – unfortunately, like most finance articles, it’s pretty technical and most of the important points are lost in all the jargon. I also came across myrisktolerance.com, where you can spend $30 in order to “know your financial self better.” I haven’t tried this but if any of you have – it’d be great if you could let us know as to what you thought about it.

So, I wanted to talk about risk tolerance means to me without getting technical – simply put, it’s the sinking feeling I get at the bottom of my stomach when I lose a certain amount of money (Vegas, anybody?). If you think about it that way – it’s really not that complicated. For a second, forget about the “risk of a downturn in stock prices and inflation eroding an asset’s buying power…” and think about when it is that you cash out. How much do you have to lose before you break out into a cold sweat or just get plain ol’ sad?

Now think of that number – the amount of money you’re willing to lose and add a buffer of say 20% to it. Suppose that number comes out to being 15% – if you’ve invested $1,000 in a portfolio, then at any point of time you would ideally like the value of the portfolio to stay between $1,000 +/- 15%, i.e. between $850 and $1,150.  This is precisely your risk tolerance.

Now this can come off as being very unscientific especially since gambling is a one-night occurrence while your investments are supposed to last you for the rest of your life (hopefully!). But at the end of the day losing money has the same impact, whether it be in a dingy casino or sitting in front of you computer looking at your brokerage account with all the numbers in red – it really really blows.

The reason I’ve dedicated an entire post to “risk” (and maybe more in the future) is because really you can’t and shouldn’t even think about starting to invest if you have no idea as to your own risk tolerance. Risk questionnaires are great at telling you what the masses are doing but you are unique and you need to find out what it is that makes you unique. Determine your own risk! (btw, I am in no way encouraging you to take a weekend off to go to Vegas to determine your risk.. no, seriously.!)

Our goal at Accevia has always been to help our users see all their options before making an investment decision but after speaking to some of our test users, we realized that the first roadblock we’re facing is that people can’t make sense of any of the options if they have no idea as to what their risk tolerance is. Hence, this post.

Also, we’ve formally decided to embark on a quest to put together “The noob’s guide to investing” – more on that to come! Contact us if you’re interested in being one of our “noobs” 🙂

Upcoming shenanigans…

For those of you who haven’t heard already – Accevia is now officially Accevia, Inc. ! It’s a small step, but hopefully a step that will lead to great things to come. Along with the legal changes, we’ve also started our second development cycle. We’ve redesigned our current website and have added/taken away some features. You can see a screenshot of our updated homepage above. If you haven’t already – check out the existing site at http://www.accevia.com – email smita@accevia.com for an invite code.

The purpose of this post is to let you know that we’d *love* to get your feedback on the new design! We’re using Usabilla for this and the link to access the user-test is here.

The way it works is that we ask you questions like “What do you like about this page” or “What would you change about this page” and you get to click on things and leave comments. Please do leave comments – we’ve already gotten some results back and it’s really hard to figure out what you’re thinking if you don’t tell us! Also, these tests are anonymous and it takes away some of the guesswork if we have a somewhat better idea as to what you’re thinking.

Time duration for the test : anywhere from 10-20 minutes depending on how many comments you leave. As a final incentive to take the test – you get VIP tickets to our pre-launch party in September and to our next milestone event held at the AOL headquarters in Mountain View, where you get to meet many of the movers and shakers in Silicon Valley.

Finally, a quick note on Usabilla – it’s frickin’ cool! For a pseudo-developer like me, I hate writing lines of code that no one is going to like – so, Usabilla is the quickest and neatest way for me to get feedback on what we’re doing before I open up Eclipse and crank away. The level of detail in the results is also phenomenal. Here’s a screenshot of what the results look like for the question “Click on the things that draw your attention the most” :

You can see where people have clicked as well as a heat map to see what’s literally hot and what’s not – glad to see that people are responding positively to the bamboo :).. I definitely recommend Usabilla for any startup looking to get feedback and truly embody “user-centric” development. On that note, I also recommend checking out Dave McClure’s talk on user-centric development and Dan Olsen’s talk on “How to make your product Rock.” They were nice enough to come give a talk to all the teams that are part of SSE Lab’s summer program.

If you’re interested in attending talks like these and want to come meet us in person – leave a comment on this post and we’ll definitely pass on any details.

Cheers!

“Plant” your savings…?

Plantly's homepage

One of the first startups that we wanted to review is Plantly. Some of you may already have heard of them as they presented at TechCrunch Disrupt in NY this past May. They’re still in private beta but we had a chance to take a look at their site and if they really have a “risk-aware investment tool that aims not to suck.”

First impressions – it’s a very slick interface but the overuse of Flash can be distracting at times (I’m not sure as to what the point of the 180 boxes/”plants” on their “Find a Plan” page is…) but they do a great job in walking you through a series of quick questions ranging from how much you want to invest to how much risk you want to take on. Based on your results, they’ll recommend a basket of ETFs that would be the ideal diversification strategy based on your portfolio size and risk profile. What’s cool is the fact that you can optimize your portfolio based on the transaction fees charged by your brokerage – it’s nice to be able to see how much you’ll actually be spending in fees before you go through and make the decision to invest in a certain portfolio.

So, if what you’re looking for is one step above a cookie-cutter recommendation, Plantly is the tool for you. It’s easy and very simple to use.

But we also found it almost too simple to use – we personally found the oversimplification of the risk portion of the portfolio was a little alarming. Seeing a couple of graphs that give me a series of scenarios of how my portfolio is going to do is nice but I’d really like to see how the recommendations have done in the past. Plantly does give you profit numbers so people can see what the returns of their recommended plan would have been if you had invested at some point in the past. What’s missing is the volatility of these portfolios – sure you’re telling me that I could have made 10% in profit had I invested a year ago, but is it 10+/-2% or 10 +/- 20%? That suddenly completely changes the situation…

What also worries me is the fact that when you look at how their recommended plan has done in the past – you can see the profits that you would have realized had you invested say a year or two years ago. But it’s always just profits! This is rather disconcerting since the recent economic conditions have been far from ideal (duh). So, it makes me feel that their algorithm for picking their ETFs is just picking the combination of ETFs, that in hindsight, outperformed the market. Now this is misleading especially considering that historical returns are in no way an indication of how the market or your ETFs are going to do in the future – think “random walk.”

But since Plantly warns all users to “not invest just yet,” they’re probably already thinking of ways to address the issues I’ve brought up in this post. They’ve got some cool features that you could use right now but you’d just have to augment it with other tools and services provided by either Morningstar or your own brokerage firm.

Definitely worth checking out and ask them for an invite code if this is something you would be interested in!

Accevia private alpha launch!

Our new homepage!

Hi, it’s been a while since we last posted anything on our blog. But we definitely have news – Accevia is finally in private alpha. For those of you who knew us when we were investAway, we hope you like the new and *improved* version! If you want to sign up to be one of our rockstar test users, email smita@accevia.com for an invite code. Also, follow us @accevia if you were previously following us @investaway.

We’ve had a whole load of new changes at Accevia recently. As a quick background on us – investAway was a class project at Stanford and our premise was basically to create something that would literally and figuratively broaden our investment horizon. Our idea was to help people out there, like us, who want to know what’s cool and hip in the world of investing, especially since there are so many new ideas and startups out there. More than just talking about these cool services, we wanted to make them accessible – whether it be Registered Investment Advisors (RIAs) who only take on filthy rich clients or niche startups who’re just getting started – we wanted our users to be the first to know about them and to use them (think better deals!).

We’re still on the same path and thankfully, with all the help of SSE Labs (Stanford’s very own startup incubator), we’ve rebranded as Accevia.

We’re using this blog as a way to talk about the financial services and tools that we find fascinating and worth using. As we’re a team made up of a recent grad (who is still bumming at Stanford!) and a current student – we are going to focus on the tools that are free and really easy to get started with.

Stay tuned!

Oops.. I'm broke by 75?

I ran across a cool personal finance site the other day – learnvest.com. It’s a site focusing on the personal needs of women, which I strongly relate to – not only because I am a woman but because of the following facts: as a woman I’m going to live longer than my spouse, I’m going to take more time off (maternity leave, etc) and I will probably make less than my male counterpart – which makes retirement a much more pressing issue for all women in general. Being broke while being old is quite a bleak thought, at best.

The site is rather crowded and there’s a whole barrage of information provided from the sun tanning to the cheapest savings account. But the one thing that’s definitely worth checking out are their calculators – they’re free and very easy to use. Most importantly, they show you your “broke”-factor, as I like to call it. Their Retirement Shortfall calculator is a great way for you to see how much income you’ll need for after retirement and how long you’ll be able to sustain the kind of lifestyle you had prior to retiring.

As a 22 year old – retiring seems EONS away but I also know that each day brings me closer to it (sadly..). And apparently, given the kind of life-style I want to have as a 65 year-old, my nest-egg will be long gone by the time I’m 75 – so, I have 10 years of somewhat okay retirement and then the rest of my years would be spent shuttling from one kid’s place to another’s – doesn’t sound too promising in my mind. The fact that I am a potential future liability not only for myself but for my future family is a daunting enough prospect for me to get my act together now. LearnVest recommends saving putting away 15% of your income today in an IRA or ROTH IRA (they have a great page on the differences between the two as well that’s worth checking out).

I’d always thought that it was enough to save ~10% of my pre-tax income but I clearly forgot to take into account inflation (can go up to 3% in the future) and any fluctuation in the returns on my assets. So, my short-term goal is to see how I can change my life-style today to increase that 10% to 15%…

I’m not a big believer in penny pinching or long checklists of things I should be doing to save (they’re boring and honestly, useless). I’m looking for an effective way for me to be leveraging my current assets in order to be generating returns that can sustain my current lifestyle as well as add to my retirement goal. Sounds lofty – but I’m sure it’s doable, just like everything else 🙂

Professional Advice or not?

I happened to come upon Paul Bucheitt’s blogpost on “What to do with millions..” – a response to a 20 year-old on Hacker News looking for advice as what to do with $5M that he/she’d just received from selling his startup. To sum it up in four words – the post is refreshing. Paul touches on two very important points – the role of financial advisors and when you should get one. To address both those issues, Paul mentions that you have to address the deeper underlying issue of knowing yourself.

This is precisely where I think that the system is flawed – I walked into Wells Fargo the other day and talked to one of the representatives about how best to go about investing my signing bonus, (which, sadly, is nowhere close to the $5M..) without taking on undue risk. After mispronouncing my name multiple times, I was walked through the cookie-cutter survey a Wells Fargo advisor walks every client through. I was given the classic recommendation of a CD where I would be earning 0.00000001% interest (seriously.) and a basket of mutual funds (most of which are Wells Fargo funds). Fantastic.

I felt like the next sucker in line for a portfolio that would undoubtedly crash and burn in the next crisis. I’m not being cynical but it just seems too easy. I’m a complicated person with complicated desires – I have a hard time gauging my own risk and suddenly I have to believe that a 20 question survey knows enough about me to recommend how I should invest my first savings? When I asked the advisor at Wells Fargo about this, they gave me the traditional answer that this is what everyone else does.

Clearly, everyone else isn’t doing the right thing.

Just look at the statistics: in the past 20 years – the equity market has seen returns of an average of 10.4%, and the bond market has seen returns of an average of 7.6%, but the average investor has only seen returns of 1.87%. With a CD giving me pretty much 0% return and a cookie-cutter basket of mutual funds, I’d be lucky to even be seeing 1.87% return!

So, what are my options? I definitely think that the way for me to start is to better understand how I deal with winning and losing money before I take any drastic steps with my money. The next step would be to find someone who legitimately recognizes the need of “knowing your client” in order to give me the right advice. I just think that it’s unfortunate that only high net-worth individuals are worth “knowing” by advisors and that the rest of us are just put in the loser buckets, i.e. we lose the most when the market doesn’t do well and then don’t ever gain enough to make up for the losses a.k.a permanently burned by the market.

Anyhow, I walked out of Wells Fargo somewhat bitter and annoyed (I’m not going to lie.) yet with a purpose – find out more about myself and then a) either get rich enough to be able to get the attention of the right advisors or b) create something that lets smaller investors like me find the right advisor.

I’m leaning towards b) right now but have to attack Step 1 first: know thyself!

Sexy inflation.. and umm not so sexy Greece

From the sandy beaches of Mykonos in Greece – time finally seems as though it’s on your side. The idyllic beaches, fantastic cocktails and all night clubs just make the rest of the world simply disappear. Heaven is an island in the Mediterreanean.

Suddenly these images are replaced with ones of riots and street warfare in Athens – an unfortunate casualty of the credit crisis as the media portrays it. I don’t deny that the credit crisis had a major part to play in Greece’s woes but I think it also has to do with the fact that no matter how much the rest of Europe loves frolicking on Greek beaches with Greek women – bailing Greece out is a completely different issue. Thankfully with the latest $750 Billion bailout plan, the Euro Zone has decided to take a forceful stance against the train nicknamed “sovereign default” heading straight for them. About time, or that train was about to turn into a ship ready to annihilate the European economy. And annihilate is a nice word to use here.

My point here is that when the Euro Zone decided on adopting a single currency across multiple nations – they gave up monetary policy, which today could have been a plausible solution for Greece’s current problems. The idea here is simple – depreciate yourself out of debt, but in this case as there is a common currency – the Greek Central Bank cannot use interest rates as a tool in its arsenal against problem such as these. Hence, the need for a massive bailout.

But what about the US? US gross debt is at a staggering 87.3% of GDP where 56.6% is held by the public, and 44.4% is intra-governmental (think China!) – that’s about $700,000 per person in the US and about $2.1 Million per household in the US. These numbers don’t even hold any meaning for me  – how does this even start to affect me?

This is where it all gets hazy as no one has clear cut answers for someone like me who is thinking about starting to build a financial plan – the focus is on all the big guys. I definitely know of at least one thing that’s impending on the horizon is inflation – with interest rates this low for these many years, the fed will most probably be too slow in hitting the accelerator on interest rates when inflation starts to take off. This might not be a bad thing especially if it allows the Fed to depreciate it’s way out of some of its debt and for me, it’s basically a great way to have an artificially bloated stock portfolio. Yes, inflation is suddenly starting to look pretty darn sexy.

So, here’s the plan – as a starting point for my financial plan, I’m thinking about going for mutual funds or ETFs with a blend of equity and fixed income – nothing too impressive. However, I definitely want to either buy in on a fund where they know exactly when to start swapping out of fixed income into equity when interest rates start going up – any ideas where I could find something like this? Or even better – what are my other options?