Probably the greatest obstacle that a person encounters when channeling part of their savings towards financial assets or investment vehicles that invest in them, such as investment or pension funds, is the concept of risk. Everyone seems to agree that risk is perhaps the most important aspect for people when making their investments.
But this being a key question, there seems to be a lack of definition of how to define what risk is. Basically the risk can be identified with different ideas. Some examples that we can find are:
- Obtaining losses, perhaps the most accepted and widespread meaning in the clients of banks and investment firms.
It can also be the deviation or variability of the results obtained. This aspect is of the utmost importance among so-called investment professionals. In this case, the risk is identified with a statistical calculation such as the volatility calculated through the standard deviation.
Another aspect to consider is to identify risks such as obtaining a return below the market or similar assets, portfolios, or vehicles. It is a concept that on the part of investment advisors and commercials also has remarkable importance.
Another concept, of course, is the degree of exposure of the portfolio to financial markets, this meaning would correspond to the vision of portfolio managers. In this case, the concept of duration, in the case of fixed-income portfolios, and beta, inequities, are close to its quantification.
They are all widely studied concepts in universities and business schools. But if you allow me and as I stated in my previous article (The keys to investment), for those people who fully advise a person or a family, risk coincides with the idea of not being able to obtain the desired objectives.
- Fortunately, the risk is manageable, as it can be expanded, decreased, or even neutralized through hedging techniques. It is also diversifiable, something that allows it to be reduced, although it does not disappear at any time from the portfolio (the concept of systemic risk). On the other hand, you should never forget that the higher the profitability, the greater the risk, and conversely the lower the risk, the lower the profitability.
- Risk is undoubtedly the price that must be paid for the investment, specifically for obtaining a certain return. When it comes to controlling risk, you might want to discuss these three basic questions with your advisor:
- What is the level of adaptation of our portfolio to the time horizons of the defined objectives?
Control of the liquidity of investments.
Degree of portfolio diversification.
Miguel A. Bernal Alonso is a professor and coordinator of the department. IEB research
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