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When it comes to financial advisory, finding the right balance between innovation and caution is crucial.
With the rise of data and technology, risk analysis software has become a popular tool for guiding investment strategies.
But should we rely on this software? What are the risks of doing so?
In this episode, Adam Scott explores the world of risk analysis software in the financial advisory industry. He uncovers the misuse of the software by some advisors who manipulate them to present past performance and cherry-pick investments, emphasizing the importance of combining it with wisdom and knowledge.
Adam discusses:
- The frustrations and limitations of risk analysis software used in investment strategies
- How advisors can cherry-pick investments using risk analysis software to show better returns and lower risk to potential clients
- A clear example of how the risk analysis software can provide misleading information, missing important market events
- How stress tests can be used to compare portfolio performance during the financial crisis and other events
- The story of Long-Term Capital, a hedge fund that relied on mathematical models and efficient market theory but ultimately failed
Related: The 6 Biggest Mistakes DIY Investors Make and How To Avoid Them