Risk and Return (Part 3)

How do you control credit risk?

Everything carries risk. People understand this intuitively, but they are notoriously bad at evaluating risk. For example, many folks are afraid of flying, but typically the most dangerous part of air-travel is the ride to the airport. In the same way, after Jaws came out people became much more aware of the risk of a shark-attack, but the most dangerous item in the book and the movie was the air-mattress one young boy was swimming on. Drowning kills lots more people than shark-bites.

In investing, it’s important to quantify the risks and the returns that we expect from our investments. With the Fed engaging in “financial repression,” essentially artificially supporting the economy on the backs of savers, we can’t build a Treasury bond ladder and expect real returns. But by taking prudent credit-risk, investors can maintain their income.

The key is to quantify the risk. I’d discussed in the past how credit hangs on five fundamentals: liquidity, solvency, efficiency, credibility, and growth. By watching these factors—and especially their trends—careful bond buyers can add to their returns.

Douglas R. Tengdin, CFA

Chief Investment Officer

If you have questions or comments, please write me at questions.

By | 2013-05-01T09:35:53+00:00 May 1st, 2013|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. –
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