Let’s define risk. The wall street folks define risk using Harry Markowitz’s approach, calling it volatility. They throw a “statistically significant” number of performance observations on a chart and come up with a variance—meaning how wide of a range is there from the average return over that time period to its largest and smallest data points41. They throw around terms like “High Vol”42 and “Low Vol.” Heck, they have created and sold the public investments that simply quantify this term called “Vol.”
Could Predictability be a better term?
Perhaps a better way to communicate this concept is with the term predictability. Most investors are trying to achieve some rate of return over a specific time period. We know historically from the Ibbotson data set what markets will return, we just don’t know when they will have those returns. Market performance is unpredictable.
To my way of thinking, risk is going busted. Your money goes away. It’s worthless.
But if one is invested in a properly diversified stock portfolio, what we seek is as much predictability as possible. This is a different goal.
The ultimate goal is preventing panic selling.
Taking this thought a step further, the risk is that during a down market your client will need to pull capital out, selling assets at distressed prices instead of waiting for the imminent bounce. This panic selling potential s another form of risk.
Lack of predictability says it will happen over a specific period, not in the next week or month or year. The returns will happen, but I can’t predict when. If you will be patient and wait the market will gets healthy. Bear markets in the United States last from 6-24 months. Be patient.
