Risk I think we need this
Discussion
OK gentlemen, keep it civil.
Braindrain you are welcome, but please understand not everyone has a 3 million real estate portfolio.
Risk, it can be a very individual thing or it can be an actual number.
Which is why the other thread almost got unpleasant.
So, let's first look at Bonds, in the High Yield market usually BBBs, the risk is calculated and was below 2% and was paying at that time around 5.8%.
The number went over 2%, so I sold as that meant for me the risk was too high for that yield.
I applied the industry figure to my personal risk return. As I'm a tight bugger.
So next I looked at Emerging Markets Dollar Bonds, I discovered that the fund managers had moved away from purely sovereign debt and had a decent percentage of Corp. Thus reducing the risk. That gave me a tad over 6% with acceptable risk, with the added bonus that with a strengthening Dollar none Dollar investors would find this an excellent currency hedge. Which is what happened Emerging Market Dollar Denom Bonds up 20% in one year.
So I guessed right, but even if I was wrong I still get the 6%.
So I can use a little perception and luck without elevating my risk.
PS, I didn't get rich on that, EM bonds was quite a small percentage of total assets, but it helps.
But I guess not too many people here are interested in Bonds, never seen a thread.
There is risk pertaining to cash, with regard to value which I think is a mystery to many, but it's pretty simply just think back to how much four pints cost you when you left school and how many pints that would buy you now. UK houses are a special case but still valid.
So the risk of cash becomes very real when one considers what it can buy.
General risk. The risk that an individual must take in order to attain a goal... Target for the pedantic. So if your target is 1 million you are 42 years and currently have 100K a professional will be able to tell you how much you need to save each Month to reach that figure. Your appetite for risk will affect your "stashing amount" or may even make the goal unobtainable.
Equity risk, yep there is risk, but it has be measured against cash risk. And just to complicate it, Bond risk too.
I am a proponent of equity to get where I want to be, that is for every shelf in my fridge to have food.
I moderate my equity positions by diversification to most regions of the world, which limits my growth but reduces my risk because some of those investments are contrarian (currently in the toilet) I do of course monitor those bits quite often.
Bonds can also moderate equity risk, but very difficult at present and I'm at an unusually low percentage of investable NAV.
As a note to "that other thread" the best ROI on UK housing is to stick 6 illegals in a shed at the bottom of your garden.
Crap ...I meant to hit preview and did submit....what hell
Braindrain you are welcome, but please understand not everyone has a 3 million real estate portfolio.
Risk, it can be a very individual thing or it can be an actual number.
Which is why the other thread almost got unpleasant.
So, let's first look at Bonds, in the High Yield market usually BBBs, the risk is calculated and was below 2% and was paying at that time around 5.8%.
The number went over 2%, so I sold as that meant for me the risk was too high for that yield.
I applied the industry figure to my personal risk return. As I'm a tight bugger.
So next I looked at Emerging Markets Dollar Bonds, I discovered that the fund managers had moved away from purely sovereign debt and had a decent percentage of Corp. Thus reducing the risk. That gave me a tad over 6% with acceptable risk, with the added bonus that with a strengthening Dollar none Dollar investors would find this an excellent currency hedge. Which is what happened Emerging Market Dollar Denom Bonds up 20% in one year.
So I guessed right, but even if I was wrong I still get the 6%.
So I can use a little perception and luck without elevating my risk.
PS, I didn't get rich on that, EM bonds was quite a small percentage of total assets, but it helps.
But I guess not too many people here are interested in Bonds, never seen a thread.
There is risk pertaining to cash, with regard to value which I think is a mystery to many, but it's pretty simply just think back to how much four pints cost you when you left school and how many pints that would buy you now. UK houses are a special case but still valid.
So the risk of cash becomes very real when one considers what it can buy.
General risk. The risk that an individual must take in order to attain a goal... Target for the pedantic. So if your target is 1 million you are 42 years and currently have 100K a professional will be able to tell you how much you need to save each Month to reach that figure. Your appetite for risk will affect your "stashing amount" or may even make the goal unobtainable.
Equity risk, yep there is risk, but it has be measured against cash risk. And just to complicate it, Bond risk too.
I am a proponent of equity to get where I want to be, that is for every shelf in my fridge to have food.
I moderate my equity positions by diversification to most regions of the world, which limits my growth but reduces my risk because some of those investments are contrarian (currently in the toilet) I do of course monitor those bits quite often.
Bonds can also moderate equity risk, but very difficult at present and I'm at an unusually low percentage of investable NAV.
As a note to "that other thread" the best ROI on UK housing is to stick 6 illegals in a shed at the bottom of your garden.
Crap ...I meant to hit preview and did submit....what hell
I think wiki lists 18 forms of risk, but also makes the following comment:
" Risk is a term often used to imply downside risk, meaning the uncertainty of a return and the potential for financial loss".
Some of it may be truly quantifiable (though I'd be skeptical about accuracy) but most of it is only an opinion, not least because so many unpredictable variables affect realtime outcomes. This makes me question how much emphasis to put on it before making decisions.
" Risk is a term often used to imply downside risk, meaning the uncertainty of a return and the potential for financial loss".
Some of it may be truly quantifiable (though I'd be skeptical about accuracy) but most of it is only an opinion, not least because so many unpredictable variables affect realtime outcomes. This makes me question how much emphasis to put on it before making decisions.
jeff m2 said:
OK gentlemen, keep it civil.
Braindrain you are welcome, but please understand not everyone has a 3 million real estate portfolio.
Risk, it can be a very individual thing or it can be an actual number.
Which is why the other thread almost got unpleasant.
So, let's first look at Bonds, in the High Yield market usually BBBs, the risk is calculated and was below 2% and was paying at that time around 5.8%.
High yield refers to sub-investment grade i.e. BB+ and below.Braindrain you are welcome, but please understand not everyone has a 3 million real estate portfolio.
Risk, it can be a very individual thing or it can be an actual number.
Which is why the other thread almost got unpleasant.
So, let's first look at Bonds, in the High Yield market usually BBBs, the risk is calculated and was below 2% and was paying at that time around 5.8%.
jeff m2 said:
The number went over 2%, so I sold as that meant for me the risk was too high for that yield.
I applied the industry figure to my personal risk return. As I'm a tight bugger.
So, presumably in this case you are referring to 'default risk', rather than the multitude of other risks that could be relevant?I applied the industry figure to my personal risk return. As I'm a tight bugger.
jeff m2 said:
So next I looked at Emerging Markets Dollar Bonds, I discovered that the fund managers had moved away from purely sovereign debt and had a decent percentage of Corp. Thus reducing the risk.
Why do you think moving away from government debt to sovereign debt reduces the risk? Normally the opposite would apply.jeff m2 said:
That gave me a tad over 6% with acceptable risk, with the added bonus that with a strengthening Dollar none Dollar investors would find this an excellent currency hedge. Which is what happened Emerging Market Dollar Denom Bonds up 20% in one year.
Do you mean that you were happy leaving the currency risk unhedged?jeff m2 said:
So I guessed right, but even if I was wrong I still get the 6%.
So I can use a little perception and luck without elevating my risk.
PS, I didn't get rich on that, EM bonds was quite a small percentage of total assets, but it helps.
But I guess not too many people here are interested in Bonds, never seen a thread.
Most discussions are about long-term investment, which for most people tends to focus on equities and property.So I can use a little perception and luck without elevating my risk.
PS, I didn't get rich on that, EM bonds was quite a small percentage of total assets, but it helps.
But I guess not too many people here are interested in Bonds, never seen a thread.
jeff m2 said:
There is risk pertaining to cash, with regard to value which I think is a mystery to many, but it's pretty simply just think back to how much four pints cost you when you left school and how many pints that would buy you now. UK houses are a special case but still valid.
So the risk of cash becomes very real when one considers what it can buy.
You're referring to inflation risk?So the risk of cash becomes very real when one considers what it can buy.
jeff m2 said:
General risk. The risk that an individual must take in order to attain a goal... Target for the pedantic. So if your target is 1 million you are 42 years and currently have 100K a professional will be able to tell you how much you need to save each Month to reach that figure. Your appetite for risk will affect your "stashing amount" or may even make the goal unobtainable.
Yes - this is effectively a form of drawdown risk - unless you can lock-in guaranteed returns to achieve your goal, you need to take some investment risk - the amount of risk you can 'afford' will be linked to your appetite to deal with any shortfalls.jeff m2 said:
Equity risk, yep there is risk, but it has be measured against cash risk. And just to complicate it, Bond risk too.
I am a proponent of equity to get where I want to be, that is for every shelf in my fridge to have food.
I moderate my equity positions by diversification to most regions of the world, which limits my growth but reduces my risk because some of those investments are contrarian (currently in the toilet) I do of course monitor those bits quite often.
Equity risk can be in terms of volatility or in terms of downside risk.I am a proponent of equity to get where I want to be, that is for every shelf in my fridge to have food.
I moderate my equity positions by diversification to most regions of the world, which limits my growth but reduces my risk because some of those investments are contrarian (currently in the toilet) I do of course monitor those bits quite often.
jeff m2 said:
Bonds can also moderate equity risk, but very difficult at present and I'm at an unusually low percentage of investable NAV.
Why you presumably mean is that bonds provide some diversification away from equities, adding bids to an equity portfolio can improve overall portfolio risk, given that bonds and equities are unlikely to be perfectly correlated.jeff m2 said:
As a note to "that other thread" the best ROI on UK housing is to stick 6 illegals in a shed at the bottom of your garden.
Perhaps. But the OP's question is nothing to do with ROI, the point some people are missing!jeff m2 said:
There is risk pertaining to cash, with regard to value
It's true that the buying power of cash will decline with inflation, but is that actually 'risk'? What I mean by that is that it's a known risk, so you can decide whether to take it or not; it won't be a surprise. Unlike your 'low-risk' funds that suddenly tank because the markets fell.Somewhere 'uncertainty' comes in, but not sure if that's the same as 'risk'.
Simpo Two said:
It's true that the buying power of cash will decline with inflation, but is that actually 'risk'? What I mean by that is that it's a known risk, so you can decide whether to take it or not; it won't be a surprise. Unlike your 'low-risk' funds that suddenly tank because the markets fell.
Somewhere 'uncertainty' comes in, but not sure if that's the same as 'risk'.
Uncertainty and risk are different.Somewhere 'uncertainty' comes in, but not sure if that's the same as 'risk'.
It's clear that how the industry sees and defines risk is much more complex than how the layman perceives it. Much as an actuary's view of lifespan etc.I guess it's a really a model trying to define reality. If you could actually nail risk down then a computer program would just tell you what to invest in and it would be right.
Sidicks,
I typed that pretty quickly and hadn't even really decided to post or not.
Not that important.
I did make an error in that the it was the movement of the Default Rate of around 2% on which I based my risk.
High yield at that time contained quite a hefty lump of Bank Loan, so really HY is what the Fund Managers put in it.
I usually dissect a fund before entering.
EM $ Bonds; Happy with it being unhedged, well I'm a Dollar investor, but were I still Sterling I would still not hedge against a stronger currency.
If I thought it needed hedging I would probably have not gone ahead. It was the growing strength of the Dollar that made it appealing.
Volatility has never bothered me, often an opportunity to re balance and get a leg up.
Contrarian positions IMO do have a calming effect because they have lower P/Es and are not in a bubble (obviously)so will not be hit by a correction to the same extent. So yes, Russia, Eastern Europe not off limits for me. I'll take it where I can get it
From where I sit Europe looks contrarian
And yes, I would have deleted the ROI comment, unnecessary.
I would also have changed the title a little....it infers we need risk, it should been "Risk - it needs explaining" 'cos that last thread was quite (fill in your own word)
I also only paid for the 5 Pound argument.
I typed that pretty quickly and hadn't even really decided to post or not.
Not that important.
I did make an error in that the it was the movement of the Default Rate of around 2% on which I based my risk.
High yield at that time contained quite a hefty lump of Bank Loan, so really HY is what the Fund Managers put in it.
I usually dissect a fund before entering.
EM $ Bonds; Happy with it being unhedged, well I'm a Dollar investor, but were I still Sterling I would still not hedge against a stronger currency.
If I thought it needed hedging I would probably have not gone ahead. It was the growing strength of the Dollar that made it appealing.
Volatility has never bothered me, often an opportunity to re balance and get a leg up.
Contrarian positions IMO do have a calming effect because they have lower P/Es and are not in a bubble (obviously)so will not be hit by a correction to the same extent. So yes, Russia, Eastern Europe not off limits for me. I'll take it where I can get it
From where I sit Europe looks contrarian
And yes, I would have deleted the ROI comment, unnecessary.
I would also have changed the title a little....it infers we need risk, it should been "Risk - it needs explaining" 'cos that last thread was quite (fill in your own word)
I also only paid for the 5 Pound argument.
Simpo Two said:
It's clear that how the industry sees and defines risk is much more complex than how the layman perceives it. Much as an actuary's view of lifespan etc.I guess it's a really a model trying to define reality. If you could actually nail risk down then a computer program would just tell you what to invest in and it would be right.
Simpo Two said:
It's clear that how the industry sees and defines risk is much more complex than how the layman perceives it. Much as an actuary's view of lifespan etc.I guess it's a really a model trying to define reality. If you could actually nail risk down then a computer program would just tell you what to invest in and it would be right.
It told me to keep buying lottery tickets.
jeff m2 said:
Actually there is, you can run a "Monte Carlo" which takes all your investable assets and runs it by a couple of thousand different scenarios.
It told me to keep buying lottery tickets.
A Monte Carlo simulation simply gives you a projected probability distribution. It doesn't predict the asset that will perform best in the next period!It told me to keep buying lottery tickets.
sidicks said:
jeff m2 said:
Actually there is, you can run a "Monte Carlo" which takes all your investable assets and runs it by a couple of thousand different scenarios.
It told me to keep buying lottery tickets.
A Monte Carlo simulation simply gives you a projected probability distribution. It doesn't predict the asset that will perform best in the next period!It told me to keep buying lottery tickets.
It also depends on what your decision will be. If you are someone and just making one decision it will often have a large uncertainty, because you can be in a P10 or P90 case and still be within the model distribution. However if you are a company and making a decision on a lot of projects they will more likely fall into the expected value since some will go well, others badly etc., thus averaging out.
And that is ignoring any "game changers" which may change the input values massively - for example maybe the probability on houses will be shown to be the "best" thing to do, but if 2 years later house prices crash your model will be rubbish and need an update on the inputs to "show" what to do next.
NRS said:
It is based on your inputs. Which if they are nonsense will give you a completely useless simulation at the end of it.
Of course.NRS said:
It also depends on what your decision will be. If you are someone and just making one decision it will often have a large uncertainty, because you can be in a P10 or P90 case and still be within the model distribution. However if you are a company and making a decision on a lot of projects they will more likely fall into the expected value since some will go well, others badly etc., thus averaging out.
And that is ignoring any "game changers" which may change the input values massively - for example maybe the probability on houses will be shown to be the "best" thing to do, but if 2 years later house prices crash your model will be rubbish and need an update on the inputs to "show" what to do next.
The whole point of a probability distribution is that it aims to show all of the possible outcomes and their probability of occurring - hence a market crash will be likely be a possible, but unlikely, scenario in that distribution.And that is ignoring any "game changers" which may change the input values massively - for example maybe the probability on houses will be shown to be the "best" thing to do, but if 2 years later house prices crash your model will be rubbish and need an update on the inputs to "show" what to do next.
The simulation can only show you the range of scenarios that might be experienced - it can't really show you the 'best thing to do'
sidicks said:
The whole point of a probability distribution is that it aims to show all of the possible outcomes and their probability of occurring - hence a market crash will be likely be a possible, but unlikely, scenario in that distribution.
The simulation can only show you the range of scenarios that might be experienced - it can't really show you the 'best thing to do'
I understand and agree with you - I probably didn't explain myself well. I was just trying to highlight to Jeff why it would be "completely wrong" for investment and why you might use it in some decisions but not others, in addition to it not actually predicting what is the area to invest in.The simulation can only show you the range of scenarios that might be experienced - it can't really show you the 'best thing to do'
You might have guessed what industry I am in with the P90/10 reference, so to use a example from there if I have one project the uncertainty span on a monte carlo simulation wouldn't really help you make a decision in some situations, but it may help if you have 20 projects since it is much more likely you will end up at your mean value due to the sample size you will have.
jeff m2 said:
Simpo Two said:
It's clear that how the industry sees and defines risk is much more complex than how the layman perceives it. Much as an actuary's view of lifespan etc.I guess it's a really a model trying to define reality. If you could actually nail risk down then a computer program would just tell you what to invest in and it would be right.
It told me to keep buying lottery tickets.
sidicks said:
The simulation can only show you the range of scenarios that might be experienced - it can't really show you the 'best thing to do'
Correct, to a certain extent, however the proper process for risk analysis using Monte Carlo should force you to develop mitigation strategies to the risks you identify If you don't get the risk profile you want when 1st running your Monte Carlo you should revisit the mitigations. I believe the end result of a Monte Carlo is less important than forcing you to go through a process of evaluating what your risks are & how to mitigate these risks. I guess thats the process a good financial advisor will take you through. The default PH answer of "chuck it all property" is not that process! 
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