Getting Reacquainted With Risk (Part 2)

There are a number of ways to manage investment risk. I would put them into three buckets: asset allocation, investment selection, and behavior.

Ben Johnson 28.06.2018
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In part 1 of this article, we discuss what risk is. Here, we discuss how to manage risk.

Risk Is Personal

This concept of risk is absurd to measure because it is deeply personal. How investors experience and respond to risk will vary depending on personality, circumstances, and experience. Investors' risk appetite may fluctuate with the market. It might also change with time.

Investors' risk tolerance is driven in part by personality. Some people are wired to seek out risk, be it in the markets or by jumping out of an airplane. Others much prefer to play it safe, with their feet firmly on the ground. Then there are the sky divers who keep their cash under a mattress and the actuaries who like to bet on the ponies after work. The point is that risk is personal.

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About Author

Ben Johnson  Ben Johnson, CFA is the Director of Passive Fund Research with Morningstar.

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