Financial Risk

Safeguards Against
Obvious as Well as Subtle Dangers

The financial arena bubbles over with risk of all types. A prime example lies in the smashup of an asset caused by a bombshell in the external environment. Another showcase is the cutdown of a portfolio due to a rash move by a jumpy investor. 

One way to classify the slew of threats is to rate them in terms of visibility. In that case, the bogeys span the spectrum from the subtle to the obvious. 

Another approach is to gauge the threats according to the level of impact. At low end of the scale is a mild discomfort that leaves no permanent scar. By contrast, the high end of the range involves a mortal blow that wipes out an asset completely. 

In the world at large, the two features of severity and visibility tend to be aligned.  The bigger the threat, the greater is its prominence in the process of analysis and the buildup of countermeasures. 

An exemplar lies in the realm of business. An executive would pay more attention to a menace that can destroy the company rather than obsess over a nettle that acts as a mere irritant.

On the other hand, the practice is often turned upside down in the wacky world of investment. In the popular image, the financial forum is a haven of logic and sensibility. All too often, though, the bazaar turns out to be more emotional and less rational than the bulk of everyday life. 

A prime example is the dominance of a mild annoyance over a grave danger. In particular, a minor vexation can attract scads of attention while a lethal danger is all but ignored. Moreover, the perversion of focus afflicts all types of players, ranging from part-time amateurs to full-time professionals in the marketplace.

A fine example lies in the inordinate amount of attention paid to a passing discomfort to the near-exclusion of a permanent takedown. For the most part, the endless churn of  the market is tracked and measured, probed and discussed, as if it were the only form of risk. 

The focus on turbulence is so intense that the financial community talks about it incessantly. In fact, the bulk of the players  – ranging from amateurs and professionals to researchers and reporters  – consider volatility to be the same thing as risk. 

As a result, the financial community pretty much ignores the graver form of risk. In reality, though, the mayhem caused by a complete crackup is far more destructive. Once an asset has blown up, it’s gone forever. No amount of prodding or pining, weeping or praying, will bring a dead portfolio back to life.

The dearth of attention to the fatal danger has to be one of the reasons why the average investor, be they amateur or professional, is unable to keep up with the market averages. To make matters worse, the bulk of investors fail to grasp the pervasiveness of the linkage between mortality and underperformance even after suffering from such an ordeal. 

The blizzard of wipeouts in the marketplace has a severe impact on the shortfall of performance by the investing public. Yet the mass of players do not see the connection. Rather, the victims chalk up each catastrophe to a rare stroke of bad luck.

The lack of insight has even been enshrined into a hallowed law of the financial forum. The chestnut is embodied in the perceived wisdom of a buying a stock and holding it forever. 

Actually, the situation is even worse than that. In the learned opinion of the priesthood, the buy-and-hold scheme is not only deemed to be a viable ploy, but is in fact touted as an unbeatable tack. 

According to the orthodox faith, no one can outshine the passive gambit of buying an asset and holding it forever. One can only ascribe such pearls of wisdom to the optimism born of inexperience in the spheres of practical commerce as well as financial markets. 

In the real economy, the vast majority of companies sprout and bloom, then fade and die within the span of half a decade. And the situation does not differ a great deal in the financial arena.

In this shifty milieu, the buy-and-hold strategy happens to be a recipe for disaster. In fact, it’s hard to envision a worse course of action for trashing a portfolio unless a zany were to go out of their way to destroy the nest egg.

Looking at the broader picture, the financial forum is such a complex and chaotic place that it’s hard to see the forest for the trees. As a result, what passes for wisdom at first glance often turns out to be mere flimflam upon closer inspection. 

To round up, the financial bazaar is rife with threats of all kinds. Some are blatant, while others are not. 

Unfortunately, turning a blind eye to the threats does not make them go away. Rather, the specters simply lurk in the shadows until they pop up unseen at the worst moments. The end result is to clobber the victims with little or no warning.

In many cases, the eager beavers in the financial ring focus on the potential gains to be had while giving short shrift to the pitfalls in store. The inevitable outcome in due course is a calamity that looks like a bolt out of the blue.

Sadly, the gravest threats in the marketplace are belittled or even ignored by the financial community as a whole. To compound the problem, the nature and extent of the destructive forces remains unseen by the mass of investors even after the blowups take place.

To round up, the host of hazards in the financial forum is diverse and plentiful and as well as noxious and persistent. In this treacherous domain, a trenchant approach to risk calls for a coherent view of the dangers in place, along with a robust defense to parry the threats.