Managing Risk

Risk is a scary word to most people. However, just as taking too much risk can cause you great heartache, so can taking too little risk. Let us begin by first defining “risk”, and then identifying some different types of risk.

Broadly defined, and in very general terms, risk is: “A situation involving exposure to danger. Exposing (someone or something valued) to danger, harm, or loss.” With this having been established, let’s look at some potential risks associated with investing.
We have systematic risk, and then we have unsystematic risk. Systematic risk, sometimes referred to as market risk, or volatility, is the risk associated with an entire market. Systematic risk can be “managed”, or mitigated in part, by adding different asset classes into a portfolio: Asset classes that have a negative or minimal correlation to one another. Unsystematic risk is company or industry specific risk. Unsystematic risk can be reduced by simply adding to the number of holdings in a portfolio.

Breaking down risk a bit further, we can identify specific types of risk that fall either on the Systematic risk side, or the Unsystematic risk side. Here are just a few!
• Interest Rate Risk
• Concentration Risk
• Recession Risk
• Credit Risk
• Inflation Risk
• Liquidity Risk
• Currency Risk

Another risk that I would like to discuss with you, is the risk of not taking enough risk. I know it may sound counter-intuitive, but it is a real concern. With folks living longer into retirement, many into their 90’s, the possibility exists, of a retiree outliving his / her assets.
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When approaching retirement, it is a good idea to consider meeting with an experienced Financial Advisor, in order to help you determine exactly how much income you will need in retirement. A good advisor will ask you detailed questions about your entire financial picture. A good advisor will listen more than he / she talks. Based on your responses to those questions, a good advisor will determine a suitable investment mix that is appropriate for your personal risk tolerance and time horizon; and that will serve to meet your long term investment and income needs.

Although past performance is no guarantee of future results, history has shown us that there is, indeed, a connection between risk and returns. In simple terms, the lower the risk, the lower the potential returns. The higher the risk, the higher the potential return / reward. It is this principle that drives the movement of the markets.

So the long and short of it, (pardon the pun) is; don’t take too much risk, but don’t get caught in the trap of taking too little risk either.