Investing/Risk Overview

Financial Risk

Nobody likes to talk about risk. The word is synonymous with loss. Wall Street avoids the term whenever possible. Plus, risk disclosures are loaded with hedge words that are used to dilute the reality of potential loss. For example, a money manager disclosure might say: "Future returns may be higher or lower that past returns". Common sense says the future will not be like the past. What the manager does not say is periods of substantial gains are frequently followed by periods of substantial losses.

Do you think any advisor, who wants to sell you investment products, starts his sales pitch with how much you will lose if you select him? You would automatically reject this advisor and select the advisor who promises the highest rate of return. Promises are illegal, but that does not stop unethical advisors from using them to sell financial products.

Wall Street

Wall Street trains advisors to avoid words like risk and loss. Instead, advisors talk about how much money you will make if you select them. There is no mention of potential loss unless you bring it up. Then advisors are trained to talk about risk in broad terms, for example  aggressive, moderate, and conservative, without describing what those terms actually mean. And, too make matters worse every advisor may have different definitions for the same words.

Burning Questions

A high percentage of investors will ask the question, "What kind of return can I expect?" Very few advisors will respond with, "I don't know. I cannot predict the future". They are going to give you a number whether it is true or not. And, even fewer investors ask, "How much will I lose if your advice turns out to be wrong"? They will be shocked by some advisors' responses.

Risk & Reward

Unethical Wall Street advisors tell investors they can produce high investment returns for low investment risk. This claim is the foundation for most investment scams and it is not true. This hi-low relationship between performance and risk does not exist. You have to take substantial risk to earn higher returns. If you want low risk, you have to accept low returns. The markets are too efficient for it to be otherwise.  

Paladin says.....

You need some idea of the amount of risk you are exposed to before you invest your assets. For example, you should require advisors to document a range for the historical volatility of their recommendations. The future may not be like the past, but at least you will have some idea of what you can expect in the future. Pay particular attention to your exposure to common stocks and derivatives.

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