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Smart Investor Makeover: The Risk of Not Knowing Your Risk (Video)


When investors got clobbered in 2008, the most common lament was: "I had no idea I could lose that much in the market."

Risk and return are kissing cousins. The more risk, the more return, but also the possibility of greater loss. Investors who are mesmerized by the high returns reported by some mutual funds and hedge funds should not view this data with unbridled enthusiasm. High return means high risk.

If you really understood risk, you would never hold an individual stock. You can obtain the same expected return in an index fund of comparable risk, with far less volatility.

Risk is critically important to investors. Yet I have never met an investor who could tell me the risk of their portfolio. Few brokers understand risk, much less how to measure it.

William Bernstein, the author of The Intelligent Asset Allocator, gives this excellent advice:

"Anytime a salesman or broker attempts to sell you a security of any type, ask him .. what its standard deviation of annual returns is... If he ... doesn't know, don't even think about buying it. If your broker is not familiar with the concept of the standard deviation of returns, get a new one."

This week's video will help you understand the risk of your portfolio.

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein.