Control Risk - Get Rewarded; Eliminate Risk - Get Disappointed

Posted by Mark on Nov 25th, 2008 | no comments

It is very hard to find someone that is happy with the performance of their investments over the last year.  The current financial maelstrom has caused many investors - and advisors - to pause and re-think not only “risk” but also their investment philosophies.

The advisors at the Aubry Group, however, are neither re-thinking risk, nor are we changing our investment philosophy.  What we have been doing is asking ourselves questions that are aimed at helping our clients better understand risk and how it affects their portfolios because risk and return are related.

What is risk?  As a noun, and in the way that most people would consider it, risk is the chance of a loss.  But, when the word is specifically applied to investing, risk is defined as “uncertainty.“  As investors, we are compensated for, and look to capitalize on, this uncertainty.

There are no guarantees in investing (or life).  Therefore, we have an expected measure of uncertainty, and along with it, a certain level of unpredictability.  While guarantees assure a particular outcome, if you place your hopes and dreams on perceived guarantees in life, you will end up greatly disappointed, especially when it comes to investing.

We talk about “controlling risk” and “managing risk” when it comes to investments.  It is very frustrating when investment accounts decrease in value and we are forced to ride out the economic storm like we currently are enduring.  However, (and this is a very important point) “controlling” and “managing” risk does not mean eliminating risk.  Since risk and return on investments are forever linked, it would be very difficult, if not impossible, to eliminate risk and achieve our financial goals.

As investors, we either need to know the history of the capital markets, or trust an advisor that has the knowledge of such history.  It is through this understanding of the history of the capital markets that portfolios are able to both control and manage the risks associated with investing over time.  Armed with this understanding of the history of the capital markets, the Aubry Group has developed a strategy that builds portfolios to capture the dimensions of meaningful risk factors which allows us to control and manage  risks over time.

The road to investment success lies in identifying the risks that bear compensation, choosing how much of these risks to take on, and then striving to minimize the risks and costs imposed by traditional approaches to investing.  Science-based portfolio engineering makes this possible.

David Booth, CEO of Dimensional Fund Advisors, was recently asked about the current market conditions and how they relate to investors.  His answer: “You have already paid for the risk . . . you might as well stick around for the expected return.”

To your success!

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