Risk: What Exactly Is It?

Risk: what exactly is it? Ponder wisdom:

“Since we live in a world without crystal balls that allow us to clearly see the future, prudent investing is all about the management of risk and expected returns. A problem that both investors and investment advisors face is defining what exactly is risk. As you will see, risk can be many different things And since risk can be many different things to different people, investors/advisors are faced with deciding which risks are the most important to manage…Another risk that should be carefully considered is that of the unexpected negative surprise. Unfortunately, one of the most common and severe mistakes made by investors/advisors is to treat both the highly unlikely as impossible and the highly likely as certain. Prudent investors know that history teaches us that just because something has not yet occurred, does not mean that it cannot, or will not, occur in the future. One has to look no further than to the events of September 11, 2001 for proof of this important point. The potential for negative surprises should be built into any investment plan. Forewarned is forearmed. There is yet another risk investors/advisors must deal with-maverick risk. As Robert Arnott points out, “practitioners ‘know’ that the greatest peril is the risk of being wrong and alone. As such, we fall prey to the Keynesian dictum that it is more acceptable to fail conventionally than to succeed unconventionally. Decisions that leave an investor alone carry the inherent risk of being both wrong and alone. If an investor is wrong and alone, a strong likelihood is that the assets’ owner will not have the patience to see the investment decision through. The decision, even if correct in the long run, will be reversed before it can succeed.” We are all familiar with the expression “misery loves company.” Experiencing relatively low (but still positive) investment results may create more psychological risks to the investment plan being abandoned than experiencing losses if everyone around is having a similar experience.”
Paul Petillo

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