Planning Briefs
Managing Investment Risk Strategically Based On Facts And Experience
Published Thursday, May 4, 2023 at: 9:42 AM EDT
An investment’s risk is usually defined as its standard deviation. The financial press and investment marketers cannot be faulted for defining risk as standard deviation. Reducing the concept to a single statistic makes it easy to understand. However, standard deviation expresses only one aspect of investment risk. It totally misses the more important human component: how you will behave in reaction to your wealth disintegrating in a crisis like the 2008 global financial meltdown. That’s what really matters in managing wealth strategically.
Standard deviation measures the risk of price fluctuations in stocks, bonds, cash, and other investments. More important than price volatility is your reaction. Investors obviously all love upside volatility, but extreme negative volatility is intolerable to some people.
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