Tuesday, February 25, 2014

What does flying have to do with investment risk?

Chuck Yeagar is perhaps best known as the first pilot to officially go beyond the speed of sound. You may recall that he was portrayed by Sam Shepard in the movie, The Right Stuff. In his autobiography he wrote "all pilots take chances from time to time, but knowing -- not guessing -- what you can risk is often the critical difference between getting away with it or drilling a fifty-foot hole in mother earth."

The key point is knowing the risk that is being taken.

Leslie Rahl wrote“Risk is not bad.What is bad is risk that is mispriced, misunderstoodor unintended." Again, the key is to understand the risk that's being taken.

It's required that those who offer investment services properly acquaint their clients with the risks they will be subject to, so that there won't be any surprises or disappointments, should things not work out as planned.

Risk measurement is the most complicated aspect of performance measurement; enough hasn't been said about it, nor do we fully understand it, though we keep trying. 

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