{"id":1195,"date":"2020-07-19T12:50:25","date_gmt":"2020-07-19T12:50:25","guid":{"rendered":"http:\/\/www.assetmultiplier.co.in\/blog\/?p=1195"},"modified":"2020-07-19T12:50:25","modified_gmt":"2020-07-19T12:50:25","slug":"what-risk-isnt","status":"publish","type":"post","link":"https:\/\/www.assetmultiplier.co.in\/blog\/2020\/07\/19\/what-risk-isnt\/","title":{"rendered":"What Risk Isn\u2019t"},"content":{"rendered":"

Nick Maggiulli<\/a> asks the investors what is the risk? Wikipedia defines it<\/a> as \u201cthe possibility of something bad happening.\u201d\u00a0In the investment industry, we commonly associate risk with\u00a0standard deviation<\/a>, or how often an investment\u2019s return varies from its average return.\u00a0 More simply, if investment A has annual returns of +4%, +4%, +4% and investment B has annual returns of +4%, -9%, +19%, then investment B would be deemed \u201criskier\u201d than investment A despite having the same long-term growth rate. But is the standard deviation the best definition of investment risk?\u00a0\u00a0Not necessarily.<\/p>\n

For any prudent investor, the difference between volatility and risk comes down to what is known versus what is unknown.\u00a0 As\u00a0Donald Rumsfeld once said<\/a>: There are known knowns; things we know we know. There are known unknowns; things we know we do not know. But there are also unknown unknowns\u200a\u2014\u200athings we don\u2019t know we don\u2019t know.<\/em><\/p>\n

Volatility is a\u00a0known<\/em> unknown, while the risk is an\u00a0unknown<\/em> unknown.\u00a0Volatility is a known unknown because though we cannot predict future volatility, we can make reasonable guesses about its future range. This is why Maggiulli doesn\u2019t equate risk with volatility.\u00a0 People will say that an investment is \u201ctoo risky\u201d for them, but what they usually mean is that it is too volatile.\u00a0 Some investors prefer the predictability of bond income while others want the thrill of individual stocks, options, and leverage.\u00a0 This isn\u2019t about risk, but about the kind of expected returns, an individual investor prefers.<\/p>\n

But, the risk is another beast entirely.\u00a0 Because risk is about the things that happen that can\u2019t<\/em>\u00a0be expected.\u00a0 As\u00a0Josh Wolfe<\/a>\u00a0has preached many times: Failure comes from a failure to imagine failure. That\u2019s where risk lives. Maggiulli says that 2020 has made him realize that black swans (an unpredictable\u00a0event\u00a0that is beyond what is normally expected of a situation and has potentially severe consequences) are the only kind of risk that matters.\u00a0 Why?\u00a0 Because they are the only kind of risk that can\u2019t be prepared for, and, thus, the only kind of risk that can cause catastrophic loss.<\/p>\n

Maggiulli asks so how do you prepare for something that can\u2019t be prepared for?\u00a0 You try the best you can.\u00a0 Do scenario planning.\u00a0 Have ample liquid savings.\u00a0 Search for flaws in your investment hypotheses.\u00a0 If you spend time to think about what is possible, then you might just be able to save yourself from some<\/em>\u00a0of these black swans. Yes, there will always be future scenarios that you can\u2019t conceptualize or account for initially.\u00a0 But, where is the harm in trying?\u00a0 Because risk isn\u2019t the possibility of something bad happening.\u00a0 Risk is the possibility of something bad happening\u00a0that you didn\u2019t plan for.<\/em><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

Nick Maggiulli asks the investors what is the risk? Wikipedia defines it as \u201cthe possibility of something bad happening.\u201d\u00a0In the investment industry, we commonly associate risk with\u00a0standard deviation, or how often an investment\u2019s return varies from its average return.\u00a0 More simply, if investment A has annual returns of +4%, +4%, +4% and investment B has […]<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[74],"tags":[],"_links":{"self":[{"href":"https:\/\/www.assetmultiplier.co.in\/blog\/wp-json\/wp\/v2\/posts\/1195"}],"collection":[{"href":"https:\/\/www.assetmultiplier.co.in\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.assetmultiplier.co.in\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.assetmultiplier.co.in\/blog\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/www.assetmultiplier.co.in\/blog\/wp-json\/wp\/v2\/comments?post=1195"}],"version-history":[{"count":3,"href":"https:\/\/www.assetmultiplier.co.in\/blog\/wp-json\/wp\/v2\/posts\/1195\/revisions"}],"predecessor-version":[{"id":1198,"href":"https:\/\/www.assetmultiplier.co.in\/blog\/wp-json\/wp\/v2\/posts\/1195\/revisions\/1198"}],"wp:attachment":[{"href":"https:\/\/www.assetmultiplier.co.in\/blog\/wp-json\/wp\/v2\/media?parent=1195"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.assetmultiplier.co.in\/blog\/wp-json\/wp\/v2\/categories?post=1195"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.assetmultiplier.co.in\/blog\/wp-json\/wp\/v2\/tags?post=1195"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}