Managing Investment Risk Strategically Based On Facts And Experience
Published Thursday, May 4, 2023 at: 9:42 AM EDT
An investment’s risk is usually defined as its standard deviation. The financial press and investment marketers cannot be faulted for defining risk as standard deviation. Reducing the concept to a single statistic makes it easy to understand. However, standard deviation expresses only one aspect of investment risk. It totally misses the more important human component: how you will behave in reaction to your wealth disintegrating in a crisis like the 2008 global financial meltdown. That’s what really matters in managing wealth strategically.
Standard deviation measures the risk of price fluctuations in stocks, bonds, cash, and other investments. More important than price volatility is your reaction. Investors obviously all love upside volatility, but extreme negative volatility is intolerable to some people.
Statistics are useful but only go so far in managing a portfolio. The financial services industry, media and internet have a bias toward simplifying investing. They speak in an authoritative voice as though anyone can allocate their investments correctly to meet their retirement and estate planning goals.
But there is no substitute for a relationship with a professional who gets to know you, someone who can help you discover how big a loss you can tolerate before panicking by selling and abandoning your strategic plan.
At a time when artificial intelligence is about to expand human knowledge exponentially, nothing compares to investment advice from a professional who knows you, who has assessed your risk personality characteristics, and has experience in applying the requisite technical knowledge.
Nothing contained herein is to be considered a solicitation, research material, an investment recommendation, or advice of any kind, and it is subject to change without notice. Any investments or strategies referenced herein do not take into account the investment objectives, financial situation or particular needs of any specific person. Product suitability must be independently determined for each individual investor. Tax advice always depends on your particular personal situation and preferences. You should consult the appropriate financial professional regarding your specific circumstances. The material represents an assessment of financial, economic and tax law at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete, and is not intended to be used as a primary basis for investment decisions. This article was written by a professional financial journalist for Advisor Products and is not intended as legal or investment advice.
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