Return to Risk

Of all the questions a portfolio manager can ask, one of the most important is this: how much risk can you handle?

Risk is usually defined as variance in prices. This is convenient, because it allows us to quantify it. Long-term bonds are more risky that short-term; junk bonds are more risky than investment-grade; stocks are more risky than junk bonds—because their prices move around more.

But this misstates the issue. Lots of investors don’t worry about daily or monthly price changes. They want a stable income stream and a gradually growing level of capital. For these—and perhaps most—investors, anything that might threaten income or capital in the long run is meaningful. The problem we face is that many possible scenarios may unfold: more things can happen than will happen.

Diversification is an admission of our ignorance of the future. Another is making sure our decisions are reversible. How hard is it to back out of a mistake? Liquid investments like stocks and bonds make it quite easy. Others, such as annuities or hedge funds, can make it quite costly.

The past is not prelude, and history is not destiny. The sources of uncertainty today are manifold, and the keys to handling them are diversification, control, and transparency. We simply don’t know what the future holds. Anyone who tries to claim otherwise is selling something.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

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By |2014-09-05T14:47:42+00:00December 19th, 2009|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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