Returning to Risk (Part 4)

Why is risk so important?

Risk-management is at the center of rational investing. It’s what keeps people up at night when markets are booming, and what allows them to sleep soundly during panics and depressions. It’s what allows your money to work for you, so that later in life you don’t need to.

But risk-management puts a glaze over people’s eyes. Tell them you work in risk-management and they’ll quickly change the subject. Google the phrase and you’ll get links to wiki articles about engineering problems in the International Space Station and a magazine about insurance.

We’ve seen before how short-term risk is linked to returns through the financial structure of the investments, and long-term risk comes from outside factors like inflation or taxes or economic depression. Short-term risk allows your money to grow; long-term risk tries to take it away.

The genius of the Enlightenment was that men and women are not passive before the forces of nature, but they can first learn how the world works, and then put these principles to work to better their conditions. In the process, great wealth can be created. But government actions or random events or our own foibles can quickly destroy it. Understanding and managing these threats is critical.

Because it’s not what you make, it’s what you keep.

Douglas R. Tengdin, CFA

Chief Investment Officer

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