Most investors incorrectly think of “risk” as the possibility that the market value of a financial asset might fall below the amount that has been invested… OMG, how could this be happening!
Wall Street does everything in its power to support such misconceptions.
The ideas that lower market price = loss or bad and that higher prices = profit or good are the greatest risk creators of all. They invariably cause inappropriate actions by individuals and advisors who are less familiar with the ways of the investment gods than they should be.
Risk is the reality of financial assets and markets: the current value of all “marketable” securities will change frequently. If there is no risk of loss, there is no investment. BUT investment portfolios can be designed to minimize risk and render market price volatility much less problematic than you’ve been brainwashed into believing.
This series of articles will deal with the nuts and bolts of risk minimization: Selection Quality, Diversification Rules, Income Requirements, and Profit Taking Disciplines.
The media hype surrounding market volatility, and the hysteria it causes among investors is unwarranted and institutionally self-serving. After you study these articles, you’ll welcome both short-term market volatility and long-term cyclical change… in both investment markets, equity and income.
The reality of financial impact cycles (market, interest rate, economy, industry, etc.) doesn’t fit at all well into Wall Street’s hindsightful, calendar year assessment mechanisms. The amount, cause, frequency, range, and duration of market value change will always vary in an “I-don’t-care-who-you-listen-to” unpredictably certain way — the certainty being that the change in market values of investment assets is inevitable, unpredictable, and (actually) essential to long-term investment success.
Without these natural changes, there would be no hope of gain, no chance of buying low and selling higher. No risk, no profits, and no excitement— boring.
The first steps in risk minimization are cerebral, and demand an understanding of the fundamental purpose of the two basic classes of investment securities: growth and income
From the investor’s perspective: equity securities are expected to produce growth in the form of realized capital gains, and income securities are expected to produce dividend, interest, rent, and royalty income. But nothing produces “real” growth until either the gains or the income are realized — even the obscenely ineffective IRC appreciates the insignificance of “unrealized” gains.
Alternative investments are risk creators. These are contracts, gimmicks, commodities, and hedges that college textbooks once called speculations. Until MPT thinking took over, fiduciaries, trustees, and unsophisticated individuals weren’t allowed to use them.
