From the category archives:
The finance community and financial services industry most commonly define “risk” as variability of annual returns.
I’ve never much liked that definition.
For example, in my retirement portfolio, I don’t care in the slightest what happens on a year-to-year basis. I’m much more concerned with what my annualized return will look like over the next 30 years. [...]
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There’s a poker saying that if you can’t spot the sucker at the table, you must be the sucker. The investing corollary:
If you can’t spot the risk in an investment, you don’t understand the investment.
Bonds are generally assumed to be a low-risk investment. And in many (though not all) cases, that’s true. But they’re never [...]
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“The single most reliable indicator of fraud is the promise of high return with low risk.” — William Bernstein in The Investor’s Manifesto.
It’s no secret that risk and return are related. But how should we measure risk? For decades, the finance community has been equating risk with volatility (often calculated and presented in the form [...]
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We’re about to dig into something a bit more technical than we usually discuss on this blog, but I promise it’s worth it. Understanding the concept can have a direct impact on your investment results.
Risk (in the finance-world sense of the term) can be broadly divided into two categories:
Diversifiable risk, and
Undiversifiable risk (also known as [...]
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As you probably know if you’ve been following this blog for very long, I tend to recommend rather high equity allocations for those of us who still have multiple decades to go until retirement.
My own retirement portfolio is 90% in stock index funds, and as I’ve discussed before, I don’t see anything wrong with being [...]
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The state of Oregon is suing Oppenheimer Funds for understating the risk it took while managing a bond fund in the state’s college savings plan. From the Wall Street Journal:
Oregon charges that Oppenheimer Core Bond fund, which was in the state’s 529-plan options billed as “conservative,” became significantly more risky starting in late 2007 or [...]
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Finance world’s definition of risk: The likelihood of less-than-expected returns. (Or, “unpredictability/variance of returns.”)
Rest of the world’s definition of risk: The likelihood of negative returns. (Or, “the chance of losing money.”)
In my opinion, this is a problem. The finance community uses the word “risk” to mean one thing, while the rest of the world uses [...]
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While recently reading Against the Gods, I came across one of the best explanations I’ve ever heard for a topic that I spend a lot of time talking about: Volatility. The author (Peter Bernstein) quotes a fellow named Robert Jeffrey as saying that:
Volatility per se, be it related to weather, portfolio returns, or the timing [...]
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In case you haven’t noticed from earlier posts, I have some complaints about the common use of the word “risk.”
I think I’ve finally figured out what it is that bothers me so much: We use the word “risk” to encompass several distinct concepts that should really be kept separate. For example:
We call investing in a [...]
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In an interview with Money Magazine editor Eric Schurenberg, author/associate professor/retirement expert Moshe Milevsky made the following statement that I particularly enjoyed:
I think advisers tend to take the mental aspect a little too far. People’s risk tolerance changes every day. Yesterday the market is up: People are risk tolerant. Today the market plummets: They’re no [...]
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I’m currently working my way through William Bernstein’s Four Pillars of Investing. The point he hammers home in the first chapter is that the market rewards risk by providing additional return on more risky investments. This risk/reward (or risk/return) relationship is one that’s discussed frequently in the finance field.
However, as far as I can tell, [...]
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