"Ron Peterson" <ron[at]shell.core.com> wrote in message > > Does an investor need to measure the risk, or know the risk is there
- quote -

Maybe I'm just feeling cantankerous today, but few of us have any idea how
long we might live, and most of us have some idea regarding future
inflation.

I expect to live to 100 or beyond because I'm mitigating my risk of heart
disease by exercising and eating a healthy diet, wearing my seat belt, and
keeping my mind active. But there are people in my situation who have
dropped dead 100 yards from the finish line of a marathon. I'll make my plan
based on the 100 year number rather than the 100 yard number and will likely
die somewhere in between, when my heirs will have something to argue over.

At the same time, I suspect we all have some idea what inflation will be, at
least close enough to include a reasonable number in our financial plans.
Without that expectation, none of us would ever be able to retire.

Elizabeth Richardson

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Elle wrote:

- quote -

Then we disagree (not unusual unfortunately) on the definition of
'optimum', although I agree that the measures are crude.

By the way, I am not advocating trying to optimize risk.

-Will

william dot trice at ngc dot com

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On Jun 27, 11:20*am, Ron Peterson <r...[at]shell.core.com> wrote:
- quote -

Agreed (I didn't recall jIM's timeframe), time is a mitigator of
market risk. I was just citing a general example and I now think you
were giving a specific response. Hence the confusion. Had jIM's
timeframe been shorter, his risk exposure would have been greater.

- quote -

Sure it is. Anyone who thinks financial planning eliminates risk is
going to be sorely disappointed. Financial planning attempts to
MITIGATE risk. You proved it yourself with your opening statement. We
don't need to exactly know the volatility of jIM's investment
portfolio to mitigate against market risk nor do we need to know
exactly what inflation will be to counter inflationary risk. We just
need rough estimates. Of course, the better the estimate, the better
the output (in theory).

- quote -

I can't tell if you're agreeing with me or if I just did a terrible
job of conveying my thoughts earlier. All the same, this is what I was
also saying.

When most of my clients approach me for the first time, they have a
specific and obvious problem in mind. For a VERY loose example,
suppose a 35 year old inherits a large amount of money (enough that he
wants to retire now, but not enough that he's buying a Ferrari). He
comes to me for help. Well on the surface, his biggest risk seems
apparent; longevity risk (the risk he'll outlive his money). One
counter to that is an immediate annuity. Of course, that then gives
rise to inflationary risk (the risk that he'll lose his purchasing
power over time). So maybe only some in an immediate annuity and the
rest in equities intended to beat inflation. But now he also has
market risk. This goes on and on. Hopefully, I've eventually addressed
most of the risks out there and the client ends up with a nice we'll
rounded financial plan that doesn't eliminate all his risks, but
minimizes and balances them against each other. Looking back after the
plan is done, it seems pretty obvious that the plan came to fruition
primarily by simply knowing and managing the risks my client was
exposed to. The asset allocation percentages, annuities, insurance,
etc... all took care of themselves throughout the process.

Now specific product selection is another matter.

- quote -

Again, agreed. I didn't intend to counter that point. I was more or
less trying to tie the need to quatify risk vs the need to know risk
into your other post.

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On Jun 27, 10:06*am, kastnna <kast...[at]auburnalum.org> wrote:
- quote -

jiM has a long time frame (18-38 yrs.) and there should be little
market risk over that time frame.

It's not much of a science if planners can't quantify risk or know
where to go to get those risks.

A relative took early retirement a few years ago when family medical
insurance was $10,000 a year, but know it's running $20,000 a year.
She didn't have anyway of predicting those insurance costs.

- quote -

I don't think that financial planners can be expected to know the best
way for an individual to invest. A financial planner has to educate
the client as to the risks and alternatives and help the client
exercise those alternatives.

My point is that real estate and corporations are the major components
of the tangible wealth of a country and those seeking to only invest
in bonds, CDs, and immediate annuities may find themselves in trouble.

--
Ron

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On Jun 26, 11:51*pm, Ron Peterson <r...[at]shell.core.com> wrote:

- quote -

All you've done is traded inflationary risk for market risk (both
systematic and non-systematic, depending on the level of
diversification). The point was that knowing what risks you are
exposed to is primary; being able to quantify those risks MAY make
planning a little easier but is not essential to long-term planning.

Believe it or not, financial planners worth their salt know that all
of planning hinges on "risk management". Proper investment
allocations, insurance coverages, yada yada all fall into place during
the process of hedging the client's risk exposures.

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On Jun 26, 5:08*pm, jIM <noreplysoc...[at]hotmail.com> wrote:

- quote -

Sometimes. For instance, you don't know what inflation is going to
run. But, you have some idea on how long you might live.

- quote -

Just invest in corporations. If inflation occurs, the corporate plants
will increase in replacement costs, allowing for less competition and
allowing for a higher price for the products produced.

- quote -

In the short run, knowing the inflation rate can help you decide if
bond investments are viable.

--
Ron

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"Will Trice" <wtrice[at]notmonitored.com> wrote
- quote -

How exact a measure? To argue risk (with regard to asset
allocation) can be quantified precisely is arguing a
fallacy. This is because churning out a number based on xyz
is mostly an exercise in garbage in, garbage out, given that
xyz can be darned arbitrary and besides, xyz's margins of
error are highly dependent on many assumptions.

The goal is to get a person in the perceived ballpark. I
happen to think jIM's definition of "optimum" is fine and
appropriate, given how crude the measures of risk for each
asset class can be and given how financial planning cannot
be an exact science.

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jIM wrote:

- quote -

No, depending on the risk. But to optimize your situation, you do need
a measure.

-Will

william dot trice at ngc dot com

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On Jun 25, 7:09*pm, Will Trice <wtr...[at]notmonitored.com> wrote:
- quote -

Does an investor need to measure the risk, or know the risk is there
and try to quantify it's significance?

For example, I have 18-38 years to retirement. I have inflation risk
and need to counter that risk. I don't need to know how much
inflation risk I have, I just need to know it's there, and invest in
assets which typically return higher than inflation to counter act
that risk.

Do I need to measure that risk to truly know it's significance to my
situation?

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On Jun 25, 6:09*pm, Will Trice <wtr...[at]notmonitored.com> wrote:
- quote -

jiM's got the right idea.

Diversification is the key but the balance of investments has to
correspond with real human needs such as food, housing, clothing,
health care, transportation, etc.

My pension fund is about equally split among bonds, foreign
investment, and domestic investment.

I have 20% of my investment portfolio in energy companies because I
realize that a good share of my expenses are for energy to heat my
house, and power my minivan.

I look at the debt load of companies to minimize risk of the companies
going bankrupt. Of course, the average S&P 500 company has twice as
much debt as equity and would need twice as much bond investment as
stock investment to balance the risk.

Large companies which have a diverse product line have less market
risk than smaller companies.

When I get to be 70, and if I am in good health, I will buy some
immediate annuities to insure against longevity.

Owning a house helps protect against real estate bubbles unless you
buy during one.

Stock options (covered calls) are a risk hedge against small declines
in market price.

--
Ron

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Andrew Koenig wrote:
- quote -

I read the article referenced here, and would ask, even if we throw
aside the definition of risk we seemed to be comfortable with, how do
you suggest one changes one's approach to investing with this new
insight? Right now, if one seeks a 3% real return, there is no way to
get that return with no risk. The last TIPs auction (4/30/08) shows a
yield of .745% just enough to pay the tax on the 3% inflation rate, for
a net real return of 0%.
Joe

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On Jun 25, 3:32*pm, "Andrew Koenig" <a...[at]acm.org> wrote:

- quote -


Ah. I understand now. The real crux of that matter is the time period.
What you were referring to is the risk of volatility over a short time
period.

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jIM wrote:

- quote -

No that portfolio is sufficient. To be optimum implies a method to
measure risk and a method to adjust risk, perhaps through allocation.
Anything beyond an arbitrary allocation also requires a risk
measurement. So how does our hypothetical investor get a measurement of
the risks you mention in order to optimize an allocation without a
strict definition(s)?

-Will

william dot trice at ngc dot com

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"kastnna" <kastnna[at]auburnalum.org> wrote in message
news:b441de1e-8ca7-4ef6-9121-076793c2c791[at]m45g2000hsb.googlegroups.com...

- quote -

Sorry, I picked a bad example. The point I was trying to make was that
there are time periods and minimum desired rates of return such that bonds
will give you a higher probability of success than stocks.

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- quote -

I agree risk is not always well defined. I thought the examples given
were weak. My response to risk is that risk is never eliminated, it
is only managed. Risk takes on many types:

Market risk ( risk that market movements will change value of
investment)
Inflation risk (risk that higher prices in future will erode value of
money invested or saved)
Currency risk (risk that if investment was into a foreign market, one
or both of the currencies could fluctuate in value, altering the value
of the investment).
Time risk (risk that at a given point in time, you do not have the
money you intended)
Manager risk (risk that the person managing the money will make bad
decisions).
Return risk (risk that another investment will provide better returns
than the investment you chose)

and this list could be expanded to include other risks (interest rate
risk, political risk, leverage risk...)

I would further argue that no one single investment will trump all the
risks, manage all the risks or eliminate all the risks.

A person needs to allocate assets to various investments (cash,
stocks, bonds, commodities, real estate, foreign investments) to
manage their comfort level of risk. When a person is comfortable with
all risks present and all risks taken, that portofolio is optimum.

And a person need to know about all the risks before they can manage
them.

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On Jun 25, 10:11*am, "Andrew Koenig" <a...[at]acm.org> wrote:
- quote -

Actually monte carlo simulations don't agree with this statement. A
$100k portfolio made entirely of diversified munis has a 40.40% chance
of falling below a 3% target after 20 years. That same $100k invested
entirely in diversified small cap value funds has a 9.60% chance of
falling below that target. Your statements are contrary to the
doctrine of "over time and in the long run, the market goes up".

[Before anyone goes nit-picking the assumptions, I didn't use any
particular funds. The software uses average statistical data for the
chosen asset classes (as provided by M*, I believe), not specific
funds.]

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On Jun 24, 3:25 am, JACK-UK <ijulianandrac...[at]gmail.com> wrote:

- quote -

"Guessing" a few recent years results is VERY DANGEROUS.
Actual statistics prove you quite wrong.

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"Elle" <honda.lioness[at]spamnocox.net> wrote in message
news:AYc8k.4792$3q7.3132[at]newsfe15.lga...

- quote -

Well, maybe. I think the real problem is that "risk" is not always well
defined.

For example, suppose I invest a sum of money now, and want to estimate what
I'll have at some time in the future based on how I choose to invest it.

It should be clear that for any given asset allocation, the standard
deviation of the amount of money I expect to have at that future time will
increase as the time gets further away. In that sense, my risk increases
with time. This is true even though the standard deviation of my expected
average return per year over that time decreases -- and in that sense, my
risk decreases with time.

Finally, suppose I have my eye set on having a particular amount of money at
a particular time in the future, and all I care about is the probability of
success at the end of that time. It should also be clear that if the time
is 20 years in the future, and the amount of money in question can be
achieved with an average 3% return, then the probability of success is much
higher if my portfolio is mostly bonds. If, on the other hand, the goal
requires an average 6% return, then adding stocks will increase the
probability of success. Moreover, keeping that 6%/year average fixed, the
probability of success increases with time. So in that sense, risk declines
over time.

So I've suggested three plausible definitions of "risk," each of which
results in a different conclusion as to how risk varies with time. Because
different definitions yield such different conclusions, I am reluctant to
use the phrase "semantical games" to describe the act of trying to define
the term "risk" rigorously. To the extent that games are involved at all,
it would be to deny that other people sometimes use the term
differently--and perhaps even vaguely.

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<redmonds[at]sprynet.com> wrote
- quote -

In my opinion, this article plays semantical games with the
word "risk."

I would like the author to state the advice he would give to
someone for investing for a five-year period (after which
the person needs the money to buy a house) and 20-year
period (when the person needs the money to do xyz) given the
choices {CDs, stocks or an allocation between the two}.

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BreadWithSpam[at]fractious.net wrote:

- quote -

Sounds like good advice. I definitely think the OP is getting way ahead
of himself by trying to figure out what to invest in.




Brian

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