Risk Management – Investing Forever Advisory

Where should you turn to for advice?

The financial services industry is broad and varied, so it behooves consumers to have a grounded understanding of how the industry works and how it is compensated.
Commissions have the potential to create a conflict of interest between the seller and the buyer. Therefore, buyer beware!
When it comes to financial advice, a fee-only fiduciary can be invaluable.

Since 1973 the S&P 500^®Index has posted considerable gains—over this period the index has averaged over 10% per year in gains after reinvesting dividends, before taxes and fees.
However, investigating other 45-year periods (going as far back as 1871) leads to a more useful picture of the index’s performance across differing economic environments.
According to history, it’s better to invest in the index over longer periods in order to increase the likelihood of providing favorable returns and decrease the likelihood of losing money.

A histogram can be used to visually interrogate the distribution of a security’s returns.
These returns typically resemble a bell-shaped curve when viewed as a histogram.
A random variable that follows this type of bell-shaped distribution is said to follow a normal distribution.
There are certain characteristics of a normal distribution that can be helpful when investigating the returns of stocks, given an understanding of the assumptions involved in such analysis.
Continue reading → Risk Management 101 (Part 3)

Volatility measures the dispersion of returns of a security, which can be estimated by calculating the standard deviation of historical returns.
Based upon this standard deviation measure, and an understanding of a stock’s average historical return we can estimate a stock’s range of expected returns.
This information can be useful in determining whether a particular stock lies within one’s risk tolerance when making investment decisions.
However, there are many assumptions associated with this analysis, which must be taken into consideration. Continue reading → Risk Management 101 (Part 2)

Sound investing comes down to focusing on what you can control, while still maintaining a solid understanding the risks associated with what you cannot.
Risk Management involves understanding and controlling for the uncertainties related to the financial markets (systematic risk) or a particular company (idiosyncratic risk).
Risk-adjusted return can be quantified by the ratio of expected return divided by risk.
Volatility is a common, although imperfect measure of risk.