Friday , 19 July 2024

What’s the Biggest Risk For Investors Right Now?

[As the expression says] “Once bitten, twice shy”. Institutional investors are still very nervous about losing money after having been caught flat-footed during the market crash of 6 years ago even though there has been an enormous recovery since then. [As a result, according to my interpretation of a recent survey,] they are trying to micro-manage every minor blip in the markets [instead of taking steps now to prepare for future downturns by asking themselves the following questions, determining the right answers and implementing them in preparation for such an eventuality.]

The above edited excerpts, and those below, are from an article* by Ben Carlson ( originally entitled What’s The Biggest Risk Right Now? which can be read in its entirety HERE.

According to the findings of AllianzGI’s third annual Global RiskMonitor survey, perceived threats to the portfolios of institutional investors over the next year include:

  1. Equity market [lower stock prices] risk (80%),
  2. interest rate [lower bond prices] risk (76%),
  3. foreign exchange (FX) risk (68%),
  4. credit risk (67%),
  5. commodity risk (64%),
  6. counterparty risk (61%),
  7. liquidity risk (60%),
  8. inflation risk (53%) and
  9. event risk (53%).

I’m always amazed by the number of professional and individual investors I talk to that have no formal plan or guidelines in place to deal with portfolio losses and risk. It comes with the territory when dealing with the financial markets, yet some investors don’t think about losses until after they occur.

A few questions come to mind:

  • Are these investors looking at risk the right way?
  • Will they make portfolio changes because of these perceived risks?
  • Do they have risk management plans in place or do they plan on making changes after the markets fall?
  • Do they understand their current risk exposures?
  • Do their portfolios reflect their ability, need and desire to take risk in the markets?
  • Will they be proactive or reactive in terms of risk management?
  • Have they set realistic performance expectations on the asset classes and investments that are included in their portfolios?
  • Do they have guidelines in place that they can follow in the event that their greatest fears are realized or will they be making discretionary decisions during the next upheaval?
  • Are they comfortable with their current portfolio positioning regardless of which way the markets move from here?
[The above being said, however,] there is one risk that these professional investors failed to mention , and which I happen to think is always the biggest risk for investors, no matter what’s going on in the markets, and that is “themselves, as always.”

What investors have to realize is that risk will never completely go away no matter what changes they do or don’t make. Risk just comes in different forms depending on the stance taken but there’s something to be said for knowing oneself and knowing one’s own portfolio.


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3. Don’t Confuse “Risk” with “Volatility” – It Could Have Dire Consequences on Your Investments

A large number of investment professionals confuse risk and volatility to the point where the terms are treated as being virtually synonymous. This has resulted in the flawed investment principle that reducing volatility will (and must) reduce risk. Such thinking is deeply misguided, and following it has dire consequences for investors. Let me explain more about what risk and volatility are and are not.

4. Risk Averse? Here’s a Better Strategy Than Having Just Cash

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