We live in risky times. Banks fail. Governments fail. How to we deal with this?
One way to manage risk is to control it. That is, if you have a business, know your customers, know your suppliers, and know your employees. Continually update your systems and procedures. Then, if disaster strikes, you’ll have a recovery plan in place to minimize the damage.
But sometimes this doesn’t stop an errant oil rig from creating billions of dollars worth of damage. Is there another way?
That way is diversification. By having many small exposures you can minimize the chances that any one of them will create significant harm. But if the exposures are linked to a common factor—like housing prices or government debt—a downturn in that area can affect your whole portfolio. So is there a third way?
Sure. One final approach is to take no risks. Stay in bed, turn off the TV, and have your food tasted. Only that approach isn’t very productive. Not to mention boring.
Risk is part of life. Control it where you can, diversify it where you can’t. And if disaster hits in spite of your efforts, remain calm. Panic may be rational, but it’s never your friend.
Douglas R. Tengdin, CFA
Chief Investment Officer
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