Step Two: Into Everyone’s Portfolio a Little Risk
Risk will be discussed at length in large part because many people have shied away from taking any risk in order to avoid loss. Here we will explore why risk in important and how it has played a role in the historical strength of the markets.

When Given Lemons… (Book excerpt) Our law of choice is much more direct:  “You know you must choose and that no choice is still a choice, take the one with the lesser risk.”  Now before you get ahead of yourself, this simply means that by taking no choice, in other words, not participating in this whole idea of investing, s/he is taking far more risk than if s/he had.  The same could be said for too little risk. To preorder the book Target2025

Risky Choices (Book excerpt) Risk essentially falls on old adages.  You don’t have to be faster than the bear; just faster than the other guy.  Benjamin Graham, legendary investor and involved in Warren Buffet’s education suggested risk didn’t eliminate the chance to make money, it played a role in how much could be made.  But taking no risk disrupts the investor ecosystem, removing a key element and making the outcome much more certain and predictable. To preorder the book Target2025

Active Trading Risks (Book excerpt) Active trading carries a great deal more risk from market volatility than indexed funds do. While the potential for huge profits are often why such risks are undertaken, the downside is equally as large. The sophistication needed to assume this kind of risk is not for the timid. Mutual fund managers must be extremely nimble and have the confidence of their shareholders. To preorder the book Target2025

Counter Party Risks (Book excerpt) Some funds paid big for this type of gamble and if I know Wall Street, this type of activity will not cease entirely. Remember, the markets need assurances and above all, risks in order to generate money for investors. This is not saying you should ignore the opportunities that risks offer.  Once again, measurement is not really the issue here. To preorder the book Target2025

Regulatory Risks (Book excerpt)  From a record-keeping standpoint, it will be tough for new investors in a mutual fund to determine why a fund did so well for so long and then suddenly, the growth dropped off. To preorder the book Target2025

Concentration Risks (Book excerpt) The question left open is whether you can trust the fund manager to understand this.  Do they concentrate your investment (under their management) too narrowly and if they do this, do they do better than fund managers who do not? To preorder the book Target2025

Correlation Risks (Book excerpt) Consider this conundrum faced by managers and those that look to these benchmarks as a way to determine performance. A fund manager who operates in the small-cap space, investing in companies that are worth less than $2 billion may find an investment worthy security.  Because there is not much in the way of liquidity (the amount of shares that are available for trading at any given moment might be small as well), the fund manager must be very careful when making his purchase. To preorder the book Target2025

Credit Risk (Book excerpt) No recent history recap is needed when someone sees the word credit.  It was this infatuation with what this word could provide that has a great many of us questioning how we get to retirement, and in our case, in fifteen years or less. To preorder the book Target2025

Equity Risk (Book excerpt)  Be warned that this is why your money may gain ground or lose it.  This is also why mutual fund investors have the upper hand over the individual trader. To preorder the book Target2025

Foreign Currency/Investment Risk (Book excerpt) We wanted a global economy and we got one. For better or worse, and we all know how worse it can be; the world doesn’t hinge on the U.S. economy, it swings with us. No longer does the world catch a cold when the U.S. sneezes, it is part of the whole series of symptoms that lead ultimately to one illness. But that might be changing making the risk that once was troublesome much less formidable moving forward. To preorder the book Target2025

Growth Risk (Book excerpt)  But growth depends on three elements: desire, trust and belief. In the mutual fund world, where growth represents potential or the fulfillment of projected expectations, you need more than the desire to build or offer something that consumers want now or will need in the future. To preorder the book Target2025

The Role of Anxiety (Book excerpt) Suppose after all of that, we find that risk tolerance is not at all what we thought it was.  That looking at the different types of risk merely provides us with nothing more than wallpaper over the real structure of the investor.  Suppose what we do is more than simply look at benchmarks, correlate returns and examine performance.  Suppose it’s our own level on anxiousness that dictates how well we will do, what we will do, and why we do it. To preorder the book Target2025

Additional Reading about Risk

Previous Books by Paul Petillo

Hardcopy: Mutual Funds for the Utterly Confused (McGraw-Hill, 2008), Retirement Planning for the Utterly Confused (McGraw-Hill. 2007), Investing for the Utterly Confused (McGraw-Hill, 2006), Building Wealth in a Paycheck-to-Paycheck World (McGraw-Hill, 2004)

eBook: Mutual Funds for the Utterly Confused (McGraw-Hill, 2008), Retirement Planning for the Utterly Confused (McGraw-Hill, 2007), Investing for the Utterly Confused (McGraw-Hill, 2006), Building Wealth in a Paycheck-to-Paycheck World (McGraw-Hill, 2004)