Risky business

Investor’s Corner with Jack Brown

The other week I read an advertisement in Barron’s that read “The five words going through every investor’s mind: What should I do now?”
A good question – true and to the point. The market is up 50% from its low, high-quality bond yields are unimpressive, and economists are calling for inflation and deflation (and a lot of both). If there’s one thing the higher powers, and not the one’s in government suits, have been trying to teach us over the past year (and through history), it’s that “risk management” should be the centerpiece to this question.

Wikipedia does a pretty good job of defining risk management: “the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events.” A mouthful, but to most investors it’s simply asking how much can I afford lose, and what am I going to do about it?

In the land of pelicans, most investors rely on their investments for a portion of current and future living expenses – making risk management crucial. Advice on risk management typically leads to the topic of asset allocation. This usually comes in one of two formats: 1) a rule of thumb based on your age, or 2) a 20+ page presentation where charts based on complicated mathematical formulas demonstrate the probabilities of certain outcomes being met. For geeks like me, I prefer the second approach, but also find great value in another approach - namely liability management where a client’s future portfolio withdraws shed a lot more light on a minimum “safe” bond allocation. Whew! Confusing, but when going through the process I’ll encourage you to get back to the basics: how much can I afford to loose, and does this recommendation fit that bill?

The two things I can say with certainty are: there will always be opportunities, and there will always be room for opportunities within a well-defined risk-management framework. So while you ponder the latest “what should I do now” advice…make sure your risk stays well managed.

Jack Brown, CFA

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