Risk Assessment

Updated 01/31/14

How Much Risk is Appropriate for Me?

At the very extreme ends of the risk spectrum there are strategies whose risk is impossible to evaluate. For example,

• Is burying gold and freeze-dried food in a vault in your backyard a good investment considering the possibilities of nuclear holocaust, global warming, resurgent communism, and asteroid impact? The probability of such disasters is so low, that there is no mathematical way of determining return/risk ratio. Any return at all would produce an astronomically high ratio.
• At another extreme, how risky is it to invest in cocaine distribution? The likelihood of disaster is so high, that no return would be enough.

At extremes it is impossible to quantify risk/reward on a rational basis.

More in keeping with reality, it is assessing the risk/return of shorting stocks vs. sitting in money market is still hard to compare What are your chances of picking the market top? What are the chances that inflation will eat up all your money market dividends?

Since most folks don't understand the risks of being 100% in money or 100% short. they choose investments that occupy a broad middle ground of risk/return. They buy and hold broad-based mutual funds or diversified portfolios of established stocks and bonds. These investors are comforted by the belief that they'll be doing no worse (or better) than most everyone else. The ultimate expression of this philosophy is to buy an S&P 500 Index Fund like VFINX.

FastTrack is not going to make you crazy!

FastTrack is aimed at those who ARE CURRENTLY buying and holding ordinary portfolios. FastTrack will encourage you to improve your risk/return ratio by regularly shifting your diversified portfolio among ordinary investments, mutual funds, ETF, and blue chip stocks. FastTrack provides tools and methods to quantify risk/return.

FastTrack will do the following:

1. Help distinguish between risky from conservative investments. . . it is amazing how many nonFastTrackers think gold funds are a low risk investment.
2. Show the difference between good management and bad. Compare MEURX with LOMCX. Both have well-known maverick managers determined to achieve maximum return. In this case more volatility DOESN'T pay.
3. Let you know what is high and what is low . . . Name any stock or fund and most "investors" will have difficulty telling you if it's currently nearer its 52-week high or 52-week low.
4. Show where institutional market players are making trades that shift the relative strength of market sectors. FastTrack is designed to take advantage of rotating markets.
5. Provide a context in which to evaluate investment advice. Too often the financial press reports what was hot last year as if it were the best place to be this year. Is the writer a true guru or merely a historian?
6. Illustrate investing, just not in the same issues all the time. FastTrack shows how to diversify over time instead of passively allocating by sector.
7. Encourage you to be invested fully at all times and NOT to market time.

When using FastTrack to improve your investing, you should  expect to do several percent better per year than before. expect this improvement year-after-year in a consistent progression toward your goals.  You should find that FastTrack works better and better over the years as you more clearly hone your goals and strategies. FastTrack makes no promise of instant wealth trading high-risk issues. You will get rich slowly using time honored allocation strategies.

Common Strategies and their Associated Risks

 Editors note: This section written in early 1998 and has not be revised since then.
Invest in an Index Fund: This is the strategy that millions of investors are following. Month by month their 401K or other retirement money pours into these funds. There is no management by either the fund company or the investor. Inevitably, this strategy like ALL strategies followed by everyone must fail. There are two scenarios:

1. There will be (has been) a speculative bubble which runs these funds to absurd heights. These funds will sharply correct losing perhaps 20%-40% of their value. Thereafter, it may take 5-10 years to recover former highs.
2. The funds will continue upward until baby boomers begin to retire in the year 2012. The S&P 500 will go flat or decline through 2015 as baby boomers liquidate their investments. Eventually, these investors will cascade into capitulation causing a major crisis in which they will lose 50% of their assets at an advanced age.

The solution for savvy investors will be to diversify into markets that are unaffected by baby boomers. Likely these markets will be what we call emerging markets in 1998. These economics will supply low cost, quality products to the US economy which in 2010 will the dominated by service industries, not manufacturing. Emerging markets are volatile and as of 1998 are suitable only for those actively managing their money. There will be opportunities both in foreign equities and debt. See the BD-INTLJ Family.

The Solution is Active Management.

Hold the good companies only while they're good. There is a right time to sell and a right time to buy. You need only trade a few times a year or less. FastTrack will help you do that.

Too Much Risk Defined: When you feel that you must buy or sell everything NOW, then your strategy has failed. You will likely be squeezed out at The Very Bottom making the BIG MISTAKE.

The Very Bottom Defined: This is the point where the last poor, suffering risk-taker finally capitulates and sells.

The Very Top Defined: This is where you buy because you just can't stand being on the sidelines any longer. Usually, this sudden courage is brought on by listening to an expert on TV urging you  to buy the stocks . . . that he is selling.