'Risk' is one of those words that is not well defined. In my world, it can mean either

a) The probability of losing money on a trade

b) The maximum possible loss from a given trade, or specific portfolio (as in how much is at risk?)

My business in trading, using risk-reducing option strategies. The discussion here is primarily directed to long-term passive investors, and the idea of risk must be different. None of these definitions of 'risk' is wrong. It's one of those words that depends on context.

'Risk' is one of those words that is not well defined. In my world, it can mean either

a) The probability of losing money on a trade

b) The maximum possible loss from a given trade, or specific portfolio (as in how much is at risk?)

My business in trading, using risk-reducing option strategies. The discussion here is primarily directed to long-term passive investors, and the idea of risk must be different. None of these definitions of 'risk' is wrong. It's one of those words that depends on context.

It seems to me predicting stock market returns over the next N years fills both those criteria- I certainly can't control it and I can't predict what it will be either. Just because I know the likely range of possibilities doesn't really predict anything.

If your plan assumes some minimum return (likely based on historical averages) then isn't getting less a real risk to your finances?

>If we can measure it, then we can control it.

I disagree- we measure a LOT of things that we can't control- the wind speed and direction of a hurricane, the returns of the S&P500….

>But, if we can control it, is it really risk?

Controlling exposure to a risk is very different than controlling the risk itself. Just because you know the likely extent of a risk (i.e. the standard deviation) and can alter your exposure to that risk that doesn't mean you have any control over the danger. In your skiing example you could eliminate the risk by never skiing or lessen it by skiing less. You didn't gain any more control over avalanches, but you really do reduce your risk by changing your exposure to that uncontrollable danger.

-Rick Francis

I believe that risk is measurable. The valuation level that applies for stocks on the day you buy a broad index fund tells you the level of risk you are taking on. Stock crashes are inevitable when you buy stocks at the sorts of price levels that applied from 1996 through 2008. We have never gone to those price levels and not seen a stock crash and an economic crisis in the years that followed. On the other hand, there has never yet been a time when investors did not see a strong long-term return on stocks purchased at times of reasonable or low prices. So the risk involved in stock investing is obviously much less when stocks are priced reasonably.

The more overpriced stocks are at the time you buy them, the more risk you take on by doing so.

Rob

The coefficients aren't stable; they aren't predictive. My view is that one must understand the “risks,” not the abstract “risk” of his positions, which occurs “randomly.”

* What will inflation do to my portfolio?
* What will happen if China's recent growth proves to be a fantasy?
* How does current Fed policy or non-policy affect me? How might it shift? What then?
* What of energy prices?
* Etc.

I wrote something on this recently: http://alephblog.com/2009/08/29/avoid-risk-make...

Keep it up. You write well, Carl.