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Jeopardy star's strategy highlights critical concept of investing

Ethan Wolff-Mann
Senior Writer
James Holzhauer setting records. (AP)

James Holzhauer is on pace to crush Ken Jennings’ “Jeopardy” record, reaching the $1 million mark in just 15 games.

Holzhauer has a jaunty way of playing that has captured the attention of “Jeopardy” fans and non-fans alike with a daring style. He bets big and takes a much riskier approach than the average contestant.

Holzhauer may seem like a reckless gambler, because he bets big ($11,914, then $25,000, then $60,013, for example) when the Daily Doubles comes up. But he’s not. He’s a professional sports better who knows exactly what he’s doing and how to take advantage of a situation in which the math works out in his favor.

In a recent interview with the New York Times, Holzhauer discussed his aggressive strategy, but couched it in a way that resembled the personal finance maxim that sometimes the riskiest thing is doing nothing.

“The funny thing is, my strategy actually minimizes the risk of me losing a game,” Holzhauer said. “If you don’t take a risk...you’re not going to win. Really, the big risk is never trying anything that looks like a big gamble.”

Holzhauer’s strategy can be applied directly to personal investing and saving for retirement: Taking no risk is a huge risk — in fact, most likely a surefire way to be in trouble.

Avoiding risk in “Jeopardy” means nothing wagered nothing earned. And the same is true for an investment portfolio. Investing in stocks vs. cash might be more risky on a day-to-day basis, but not investing in stocks invites the high risk of damage from inflation to the portfolio – not to mention falling short of funds when it comes to retirement. Over the long haul, stocks generally go up, but cash does not.

Why it’s really risky to not take on enough risk

In a reasonably efficient market, risk and return go hand in hand. In its annual retirement guide, JPMorgan Chase (JPM) highlights this well with three different portfolio options with different risk tolerances — and returns that could be reasonably expected to come with them over the long run. "Nervous Noah" saves $200 a month from age 25 to 65 in cash earning 2.0%, like a high-yield savings account.

The others invest in the stock market, which might earn something like 8%. “Quitter Quincy” invests the same $200 per month from 25 to 35, ”Late Lyla” invests also invests $200 per month but from 35 to 65, and “Consistent Chloe” invests the same amount but for the same amount of time as Noah, from 25 to 65.

When safer isn't actually safer.

“Nervous Noah” ends up with the least amount of money by far, though his investments were the “safest.” If he played “Jeopardy,” he would end up like many of the people left in Holzhauer’s wake.

It’s important to remember that Holzhauer also might beat people who are far more aggressive than he is. Holzhauer isn’t exactly throwing hail mary passes. He knows he’s good and is acting accordingly. It’s a highly analytical approach to his own skills and understanding of the game with as much emotion removed as possible.

In fact, Holzhauer’s advice is similar to Patrick Swayze’s advice as the character Bodhi from the 1991 movie “Point Break.”

“You want the ultimate thrill, you gotta be willing to pay the ultimate price,” the line goes. “Fear causes hesitation, and hesitation will cause your worst fears to come true.”

Lebanese-born American actor Keanu Reeves and American actor Patrick Swayze stand on a beach as Swayze holds a surfboard during the filming of the action movie 'Point Break' directed by Kathryn Bigelow, 1991. (Photo by Richard Foreman/Fotos International/Getty Images)

This is melodramatic, but it highlights the same two points: you need to be in the arena to accomplish your investing objectives, and you should banish your fear, as it will cause your worst fears to come true — in this case being a “Nervous Noah” and not having the retirement you want because of insufficient funds.

The best way to ensure you’ll have enough money later – and the best way to play “Jeopardy” – is counterintuitive: not choosing the “safest” path that provides no upside for the future. (Also: not choosing a wildly risky roulette-wheel path either.)

This is perhaps extra important given the millennial mindset, which was shaped by the shadow of the financial crisis and Great Recession, to be extra risk-averse. According to surveys from companies like BlackRock, many millennials are saving money, but they’re hoarding cash because they lack risk tolerance.

Obviously, the stock market can go down and crash — and does! — and that makes people nervous. But in the long run, it’s riskier to avoid it.

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Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, personal finance, retail, airlines, and more. Follow him on Twitter @ewolffmann.

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