Our Philosophy

Risk Management

Risk is the chance of permanent loss of value. The biggest risk is being on the wrong side of a trend, then spending years trying to get even. An important measurement of risk is the extent and duration of “drawdown”, which is the difference between the last high value of your investment account and its current value. Effective risk management isn’t likely to be achieved solely through diversification among assets that seem to have uncorrelated price movements. Correlations of investment returns for stocks, bonds, commodities, etc. vary greatly over time and can change quickly. This is particularly true during major market corrections, just when you might be relying on diversification to mitigate your losses. Perhaps this is why the overwhelming majority of investment managers under-perform their selected index benchmarks, and why those who do out-perform seldom do so consistently. Risk management via diversification is an underlying principal of “modern” portfolio theory (1952). Many of its assumptions have suffered theoretical and empirical challenges since its introduction. We’ve all heard “don’t put all your eggs in one basket”. This is only good advice if you assume that several of the baskets won’t lose their eggs at the same time, and that there is no way to know when to change baskets…both spurious assumptions.