There are at least two perspectives for viewing risk:
[1] The Investment
[2] The Investor
If you are looking from the perspective of the investment, then maybe (just maybe) you can measure risk in terms of how much the investment moves up and down.
This is called standard deviation.
[You can read my essay in the current issue of Financial Planning for more on risk.]
Of course you are limited by the fact that you rarely have more than a few decades of data to measure, and that with so little data it quickly becomes obvious that there is nothing standard about the deviation we experienced the last few years.
But even with those limitations, you can make the argument that this is the right measurement for the job.
The problem is that real people in the real world don’t measure risk this way. When real people talk about risk, it applies to their own money, and you don’t often hear terms like standard deviation.
What you do hear is concern that they might not meet their goals or run out of money before they run out of life.
In the investment world, risk is a scientific term, something you can measure.
In the investor’s world, risk is a very real emotional concern that can’t be measured.
{ 2 comments }
When bad results occur, the emotions take over. Some cry, some fret, others are just afraid of the future. But when markets are soaring, the only emotion in play is joy. This is far from intelligent.
I believe the intelligent investor ought to be able to remove emotions from the equation and quantify the risk of his/holdings. Then steps can be taken to reduce risk, if that is desirable. To me that means using options. To others it means diversification and asset allocation.
Regards,
When bad results occur, the emotions take over. Some cry, some fret, others are just afraid of the future. But when markets are soaring, the only emotion in play is joy. This is far from intelligent.
I believe the intelligent investor ought to be able to remove emotions from the equation and quantify the risk of his/holdings. Then steps can be taken to reduce risk, if that is desirable. To me that means using options. To others it means diversification and asset allocation.
Regards,
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