Risk = ??

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?

If Risk = Standard Deviation, then

Poll ended at 05 Sep 2005 11:48

Risk is a probability of a loss
2
11%
Risk is a measure of uncertainty
12
63%
None of the above
5
26%
 
Total votes: 19

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Re: Risk = ??

Post by Rooster »

AltaRed wrote:
SQRT wrote:I think I have a very high tolerance for risk. On several bad days in 2008-2009 our total portfolio (including employee options) was down over $1million. Didn't do anything but fret. Good thing too.
Those with multiple millions in retirement are not in the same league as the 'water treader' when it comes to risk tolerance. Half of $2million still buys a lot of marbles in retirement, more so than half of $250k. My risk tolerance at my level of net worth is considerably higher than it would be at a quarter of my current net worth.
Never know if I'm on the can afford to take more risk or don't need to take more risk side.
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Re: Risk = ??

Post by Shakespeare »

My risk tolerance at my level of net worth is considerably higher than it would be at a quarter of my current net worth.
I don't see why I should take on a high level of risk.
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Re: Risk = ??

Post by Rooster »

Shakespeare wrote:
My risk tolerance at my level of net worth is considerably higher than it would be at a quarter of my current net worth.
I don't see why I should take on a high level of risk.
Basically down to objectives. Lifestyle you want (and correspondingly risk level you're willing to accept for expected added spending power) and, beyond that, estate size if that's of any importance. Pretty personal question. Don't think there's an objective right or wrong answer - except maybe not quantifying it and making a rational decision on it (and therefore take on too much ortoo little risk with respect to objectives).
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Re: Risk = ??

Post by Shakespeare »

beyond that, estate size if that's of any importance
None.
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Re: Risk = ??

Post by Rooster »

Then that makes it easier.

:)
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Re: Risk = ??

Post by SQRT »

Determining the level of optimal risk ( given your personal objectives and personality) is more directional than absolute I think. It seems easier to say I should have more or less rather than determine the optimal level from statistical or other techniques. I guess it comes down to how much do you want in retirement and how much risk does that require and can I get more with the same risk or just as much with less risk. Finally it comes down to can you sleep at night? Although good sleepers may just be ignorant of the risks they are taking.
Some people (me) may be very comfortable with a high level of equities but generally own only banks, pipes, utilities and telcos. Anyway, it's good to think of these things from time to time.
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Re: Risk = ??

Post by kcowan »

What I find helps is to have a plan. Then if your portfolio is generating the kind of returns that you counted on in your plan, it is easier than comparing its returns to any random benchmark.

(Of course, if you are consistently not making your planned numbers, then either revise the plan or revise the portfolio.)
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Re: Risk = ??

Post by AltaRed »

Shakespeare wrote:
My risk tolerance at my level of net worth is considerably higher than it would be at a quarter of my current net worth.
I don't see why I should take on a high level of risk.
You don't, but those with a higher net worth could without unduly risking paying the bills. Higher net worth individuals always have more flexibility. Whether they have the tolerance, ability, or desire, to do so is a different question.
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Re: Risk = ??

Post by deaddog »

kcowan wrote:What I find helps is to have a plan. Then if your portfolio is generating the kind of returns that you counted on in your plan, it is easier than comparing its returns to any random benchmark.

(Of course, if you are consistently not making your planned numbers, then either revise the plan or revise the portfolio.)
:thumbsup:

Part of the plan should be how you control your risk.
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Re: Risk = ??

Post by SQRT »

I doubt many people "control" their risk. I think the best we can do is try to mitigate it. Also, while I think my assumed risk is fairly low, many here would take the opposite view.
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Re: Risk = ??

Post by kcowan »

deaddog wrote:Part of the plan should be how you control your risk.
SQRT wrote:I doubt many people "control" their risk.
I can control the spending plan and the asset allocation. The rest is up to the vagaries of the market!
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Re: Risk = ??

Post by deaddog »

kcowan wrote:
deaddog wrote:Part of the plan should be how you control your risk.
SQRT wrote:I doubt many people "control" their risk.
I can control the spending plan and the asset allocation. The rest is up to the vagaries of the market!
You can also control how much you lose.
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Re: Risk = ??

Post by SQRT »

You can control how much you lose but this can backfire. Think of those that sold out at the lows of early 2009. They ended up with the worst result. Maybe a reduction of risk but the cure ended up being worse than the disease.
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Re: Risk = ??

Post by deaddog »

SQRT wrote:You can control how much you lose but this can backfire. Think of those that sold out at the lows of early 2009. They ended up with the worst result. Maybe a reduction of risk but the cure ended up being worse than the disease.
True but if you were controlling what you lose you might have sold in the fall of 2008. It would depend on how much you were willing to lose.
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Re: Risk = ??

Post by IdOp »

If you're only willing to lose a little, I would expect a lot of small losses to be taken (each one with a commission too), and they'd add up to a significant amount over time. The exception would be if one could market-time ones purchases at the bottom of a trading range to avoid small losses. That's something I'm not confident in my ability to do.
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Re: Risk = ??

Post by deaddog »

IdOp wrote:If you're only willing to lose a little, I would expect a lot of small losses to be taken (each one with a commission too), and they'd add up to a significant amount over time. The exception would be if one could market-time ones purchases at the bottom of a trading range to avoid small losses. That's something I'm not confident in my ability to do.
Your ability to find the bottom of a trading range or your ability to take small losses? :)
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Re: Risk = ??

Post by IdOp »

Your ability to find the bottom of a trading range or your ability to take small losses? :)
Both. The trading range usually changes by the time I see it. The small losses: fortunately I'm not able to make myself take them when I know they'll be coming in droves. ;)
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Re: Risk = ??

Post by deaddog »

Yup; The trading ranges are far the easier to figure out than having the emotional discipline to take planned losses.

Getting back to the topic of risk;
The risk you run by not taking a small loss is that it turns into a big loss.

Will Rogers said, “Buy some good stock and when it goes up sell it. If it doesn’t go up don’t buy it.” I just changed the last part to “If it goes down, sell it.” Why take the risk?
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Re: Risk = ??

Post by adrian2 »

deaddog wrote:
kcowan wrote:I can control the spending plan and the asset allocation. The rest is up to the vagaries of the market!
You can also control how much you lose.
The best you have is hoping you can control how much you can lose. A stop-loss order does not guarantee you would not lose even more than you hope is the maximum loss. I'm sure you don't need an example to show you the numbers.
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Re: Risk = ??

Post by deaddog »

adrian2 wrote: The best you have is hoping you can control how much you can lose. A stop-loss order does not guarantee you would not lose even more than you hope is the maximum loss. I'm sure you don't need an example to show you the numbers.
Nope I certainly don’t need any examples. I have suffered through many gap down situations. But I have a procedure I follow when that happens. As you know, investing/trading/speculating isn’t an exact science. I’m attempting to limit my losses and keep my capital intact. I cannot predict or control the market. The only control I have is how I react to what the market does.
Haven’t we had this discussion before? :)
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Re: Risk = ??

Post by SQRT »

I find the concept of stop losses doesn't work very well for an income investor. If I sold shares every time they dropped a significant % I would also have to decide when to buy them back. Otherwise I would receive a much lower income. Seems better just to buy less risky stocks within the parameters of dividend yield. Seems to have worked for quite a while anyway.
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Re: Risk = ??

Post by deaddog »

SQRT wrote:I find the concept of stop losses doesn't work very well for an income investor.
I agree. Especially if you are happy with the dividend income.
However I will take capital gains and sit on the sidelines when the market shows signs of weakness.
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Re: Risk = ??

Post by BRIAN5000 »

Example of how I try to control risk not in any particular order

Just bought a few shares of FTS and EMA

I classify these stocks as -

- Income stocks, a little bit of growth but hopefully a slowly increasing sustained dividend. Portfolio target for this type of stock , 20% currently 19% need to add $32000
- Very Conservative stocks based on Sector, Cap rate, History etc. Portfolio target for this type and Conservative stocks, 80% currently 81% need to add $ as FI side grows. (35/65)
- limit exposure to any one stock to no more than 1-1.5% of total portfolio
- diversify over five main economic sectors in this case 20% utility currently 23%
- will add another 125 of each on further price breakdown, prefer to add in 4-6 months and as FI grows
- long term holds, trim for rebalancing
- cycle 2 and 3 payers, adds income in cycles of low portfolio distributions (I believe in total return but dividends for expenses, CG for portfolio growth)
This information is believed to be from reliable sources but may include rumor and speculation. Accuracy is not guaranteed
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Re: Risk = ??

Post by ghariton »

Larry Swedroe:
Academic research has discovered that investors have a preference for investments that exhibit the same characteristics as lottery tickets; namely, high kurtosis and positive skewness. Just as is the case with lottery tickets, this preference leads them to overinvest in the most highly skewed securities, with values to the right of the mean. The increased demand leads to higher prices, with the consequence that those securities will have lower subsequent average returns.

The research has found that there is a strong negative relationship between the skewness of an investment and subsequent returns—firms with less negative or positive skewness earn lower returns. Investments with high kurtosis and positive skewness have poor returns, similar to most lottery tickets.

<snip>

The big difference, as you probably noticed, is that investments with fat tails and positive skewness have the potential, but small likelihood, for large gains. One example of investments that exhibit lotterylike characteristics are IPOs. Research has found that IPOs experience significantly greater first-day returns (at least if you’re lucky enough to buy at the initial offering price), followed by substantially greater negative abnormal returns in the subsequent three to five years.

Other examples of investments with lottery-like characteristics are extreme small-growth stocks, “penny” (low-priced) stocks, and stocks in bankruptcy. The evidence demonstrates that investors would improve their performance if they avoided these investments instead of preferring them.

The potential for one big payout—or jackpot—is not a solid investment plan. Think of how much you’ll lose between now and your “big win.”
I've been speculating for a while that three-factor models -- volatility, skewness and kurtosis -- give more insight into security valuation than the more traditional approaches.

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Re: Risk = ??

Post by LadyGeek »

ghariton wrote:I've been speculating for a while that three-factor models -- volatility, skewness and kurtosis -- give more insight into security valuation than the more traditional approaches.
I'm confused on your terminology.

The "three-factor models" I'm thinking of, aka Fama and French three-factor model use regression analysis to curve-fit past performance. Goodness of fit (R^2) is the corresponding metric. (See: Fama-French three-factor model analysis)

volatility, skewness and kurtosis are the 2nd (some associate volatility with variance), 3rd, and 4th moments of a probability distribution. See: Moment (mathematics)
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