Risk Management

Risk refers to the likelihood that your assets will decrease in value.

Risk is unique in that it applies to the probability of losses occurring, and the potential value of those losses.

In finance, risk is considered a type of cost.

All decisions you make have some degree of inherent risk.

Inaction too often has the greatest amount of risk, so rather than becoming paralysed by attempting to avoid all risk, look at it as a type of cost that allows you to calculate whether a financial decision will reap greater benefits that the potential losses and to compare the available options.

There are a variety of different ways to:

• avoid risk,
• reduce risk, or 
• even share risk.

Each of the above has a price.

By calculating the cost-value of specific risks, it becomes possible to determine whether any of the tools available for managing risk are financially viable and are themselves an appropriate risk.

Risk management is a critical part of financial success.

You should explore:

• the different types of financial risk, 
• the ways in which risk is measured and 
• how to effectively manage the amount of risk to which you are exposed.

Additional notes

Ways to avoid risk:  diversification and appropriate use of derivatives

Ways to share risk:  insurance

In the end, the best tool you have available to you in limiting the costs associated with risk is simple due diligence.

• Do your research, make decisions which make sense to you and keep watching so you know when that decision doesn't make sense anymore.
• If someone's credibility is in question, risk mitigation can come in forms as simple as asking for a nonrefundable down-payment, just as banks will sometimes ask for collateral before issuing loans.
• Preparing for losses can be as simple as keeping enough funds available in a liquid form so you can pay your bills until you regain your losses.  
• The duration of your exposure to losses can be shortened by ensuring you always have an exit strategy - before you commit to a decision, develop a way to undo it in a worst-case scenario.

Like most things, you get out of risk management that you put into it, and as the amount of potential risk increases, so should your intolerance for sloppy risk management.

To Buy or Not to Buy: Quality first, then Potential Return at an Acceptable Risk.

To buy or not to buy - the bottom line is the potential reward and the amount of risk that you must accept to achieve it.

Always assuming you have done your due diligence concerning the quality issues, look to see if the hypothetical total return is sufficient to warrant adding the stock to your portfolio.  If the stock appears to be capable of doubling its value in five years, it's probably a good buy.

If you have been cautious enough in your estimates of earnings growth and future PEs, and if the potential reward is at least 3x the risk of loss, you'll have no qualms about buying the stock.



Use Your Common Sense

Investing is far from a precise science.

What you lose in accuracy because you are building one estimate upon another, you gain by being conservative in your estimates.

If you are careful to take the more cautious choice at every opportunity, you are rarely going to be disappointed at the outcome.

A small difference - a 1% difference in the risk would translate into only a small difference in the share price - is not enough to warrant waiting for the price to be just right.

If the price is more than just a little too high for the value parameters to satisfy you, however, you'll want to complete your study and wait for the price to come down to a more reasonable figure.



Summary:

1.  Always the Quality criteria must be met first
2.  Then look at the Total Return - this must be >15% per year.
3.  Only buy when the Risk is acceptable, that is, the potential reward must be at least 3x the risk of loss.
4.  Don't squabble over pennies when you are buying.

REMEMBER:  Prices can fluctuate by as much as 50% on either side of their averages during the course of the year; so you might be pleasantly surprised when a price you thought beyond hope just happens to materialize one day.

Would you rather be with Andrew or Linda? Businesses manage their finances just like individual people. :-)

Predicting the future networth of these individuals.

Andrew: Risky to Predict

Linda: Less Risky to Predict



Just because a business has volatile numbers doesn't mean it won't make a lot of money in the future.

It's just more difficult to predict and value = RISK.

Buffett Rule: A Stock must be stable and understandable.

What are the 3 financial risks in an investment?

What causes financial risks in an investment?

1.  Excessive debt
"Only when the tide goes out do you discover who's been swimming naked."  - Warren Buffett. 
Companies incur debts because they want to speed up time.  They can own assets now instead of waiting for them later.  Why is speeding up time a bad thing?
These are often the companies and people with a lot of debts when the market collapses.

2.  Overpaying for an investment.
Price is what you pay.  Value is what you get.  - Warren Buffett
The asset quality has not changed.  The market conditions has not changed.  The poor investment was based on the initial price paid, not the quality of the asset.  The investor overpaid to own the asset or stock.

3.  Not knowing what you're doing.
"Risk comes from not knowing what you're doing." - Warren Buffett.
Why do people value the ownership of a house but not value the ownership of a company?
People understand how to value a house.  Many people do not understand how to value a company or stock.  They definitely do not understand the value of the company when they are broken down into many shares.  So, that is the true risk here and if you are the type of person who buys company shares and never look at what they are worth and buying on the basis that "well I like this company", you are probably setting up yourself up for buying too high above the true value of the share.

Investment Risks

By understanding the various types of investment risks you will be better able to recommend securities according to a client's suitability. Remember that representatives have a fiduciary obligation to match customers with appropriate investments. 

Investment RisksRisk is simply the measurable possibility of either losing value or not gaining value. In investment terms, risk is the uncertainty that an investment will deliver its expected return.

Before you can make suitable recommendations that are in line with the investment objectives of a client, you must understand the concept of risk, the types of investment risk associated with various investment vehicles and the amount of risk that a client is willing to assume. In general, your clients must first understand that no investment is without risk and that there is a trade-off between returns and the amount of risk an investor is willing to assume in order to reach his or her financial goals.

The following tutorial, Risk and Diversification will provide you with a quick introduction on what risk is, the different kinds, and how diversification can help to minimize risk.

Read more: http://www.investopedia.com/exam-guide/finra-series-6/evaluation-customers/default.asp#ixzz1yhVI7yaD

RISKS: Not Dead Yet: Surviving Today to Triumph Tomorrow

Portfolio philosophy
Long term investing
Concentrated portfolio
Undervalued micro-cap growth companies
10-15% stake in each company
Active constructive engagement
Friendly long-term 7-9 years average ownership
Aim to build shareholder value

Risks
Return of my capital is more important than return on my capital.  Live to see another day.  Risk is real.
Risk has to be managed - at portfolio level and at company level.
Risk is not Beta or price fluctuation (volatility). To say these are risks is nonsense.
The sharp falls of 2007 to 2009, puts the academic theories of market efficiency and its utility in question.
What is taught in business school is questionable.
For example, the Madoff fund provided steady 10%-15% annual return with little volatility.
By definition, Madoff's fund had low Beta and was not risky but it is virtually a total permanent loss today except for some clawback in value from litigation.
Risk is not rotational short term loss given a long term investment orientation.
If is is not permanent, it can come back, and often it can come back very quickly.
To a trader, these rotational short term losses are often permanent and market losses are real.
Market fluctuations bring pain and fear and are viewed as opportunities, to sell or to back up the truck when Mr. Market is upset.
What are the real risks facing the investment managers?  What are the risks in investing in a single company?

Risks facing the investment manager.

Leverage risk
Leverage is lethal.
LTCM was leveraged 50 - 100:1
Bear Stern and house of cards were leveraged 50:1
Leyman was also in the comparable area.
What does leverage of 50:1 mean?
If the asset is worth 100 sen, your equity is 2 sen.
A 2% downward fluctuation will wipe out all your equity.
The stock market has seen more 2% fluctuations in the 7 months of 2011 than in the last 13 years.
Leverage magnifies the risk of loss.
We don't use leverage to magnify our return.
The only time for using leverage is as a temporary bridging source of liquidity when we found something we wish to buy, until our liquidity of fund is available.

Redemption risk.
Investors of fund tend to cash out at the worst possible time.
Selling the stocks in a fund to pay investors at this time is not the best practice.
Therefore, all new investors are educated and their funds are locked in for at least 5 years.

Other risks:
Counter party risk.
Custodian risk.
Regulatory risk.
Execution risk
Fraudulent earnings risk.

.
Risks facing the individual investment

Debt risk
Net cash position.  Debt, if used, should be modest in relation to trough EBITDA.  Preferably long term debt used to fund business.

Legal and regulatory risk
High level of these risks should make you stay away.

Market development risk
Not interested in start ups.

Competition risk
Invest in the leader in the industry with a big moat.

Execution risk
Embrace management team that can execute their strategy.

Valuation risk
We like to back up the truck to scoop when the value is good.

Exit strategy risk
Multiple pathway can be worked with the management team to make for more liquidity.

Fraudulent risk.
Check out carefully.  Due diligence.

http://valueinvestingletter.com/not-dead-yet-surviving-today-to-triumph-tomorrow.html

The Risks of owning Common Stocks

The risk of investing is directly related to the uncertainty of the rate of return that you will earn.  The less certain the return, the greater the risk.  

The risk of an investment is especially great when there is a possibility that a large negative return (that is, a substantial loss) can result.  

Thus, common stocks are more risky than bonds, and bonds are more risky than savings accounts.  Insured certificates of deposit and U.S. Treasury bills, are considered to be virtually risk free because of the certainty of how much money will be received and when the receipt will occur.

Common stocks can be very risky investments to own for a number of reasons.  

1.  Nearly all common stocks subject investors to substantial uncertainty regarding the rate of return that will be earned.  Stock prices are extremely volatile, and it is not unusual for the market price of a common stock to move upward or downward by 30% or more during a year.

You might make the argument that you haven't actually lost 30% if you don't sell at the low price, but what if it goes lower?  In any case, for example, you paid $50 for an investment that is now worth only $35.  This represents a loss of your wealth regardless of whether you sell or keep the stock.

2.  The flow of dividend income from common stocks is often difficult to forecast because, unlike a bondholder's promised interest payments that are a legal obligation of the issuer, a company's board of directors must vote to approve dividend payments to the firm's stockholders.  In other words, common stockholders have no legal right to receive dividend payments.

• The directors of a company that encounters financial difficulties may decide to reduce or even eliminate dividend payments to stockholders.  
• Directors of a company may also decide to revise a firm's direction and reduce the dividend in order to increase the amount of money that is available for expansion.  
• Even the directors of a successful company may not increase the dividends as much as investors expect.  
• What a company may pay in dividends is much easier to estimate accurately in the near term than the long term, because it is difficult to forecast the business conditions a firm will face several years in the future.  New competition, new products, changing consumer preferences, and an uncertain economy all serve to make it difficult to forecast future corporate profits and dividends.

3.  A variety of factors can affect the return you will earn from holding shares of common stocks.

• Unexpected inflation, rising interest rates, and deteriorating economic conditions can each be expected to have a negative impact on most common stock values.  
• In addition, the shares of small, little-known companies may be difficult to sell without accepting a large price penalty.  

As investors discovered during the stock market meltdown of 2008, risk is an important issue to consider if you plan to invest in common stock.

Three Faces of Market Danger

Three Faces of Market Danger

By PAUL J. LIM
Published: January 23, 2010

AFTER one of the most volatile periods for stocks in decades, it’s only natural for investors to wonder how risky the markets will be in 2010.


Weekend Business: Paul Lim on stock market risks.Unfortunately, that is impossible to predict with any certainty. But investors can at least look for the types of risks the market seems most likely to face. Those perceived dangers have shifted in recent years. In 2008, for example, there was the all-too-real risk of losing big money in the global credit crisis. Last year, after the crisis seemed to subside, investors who stayed on the sidelines risked missing out on the market’s huge rebound.

Today, strategists say, investors face risks in three major categories:

EARNINGS RISK As the economy started to heal last year, investor expectations for corporate profits started to grow. That helped to drive up equity prices by 65 percent from March 9 to Dec. 31.

But after a rally of that magnitude, “people will start to get nervous about the ability of companies to actually meet those expectations,” said Ben Inker, director of asset allocation at GMO, an asset management firm in Boston. That is partly because corporate profit forecasts have grown so lofty.

Wall Street analysts estimate that earnings for companies in the Standard & Poor’s 500-stock index were up 193 percent in the fourth quarter of 2009, versus the period a year earlier, according to a survey by Thomson Financial. Moreover, they expect earnings for all of 2010 to be up more than 28 percent from 2009.

“While we are seeing profit improvement, we think the numbers that are getting baked in are excessive,” Mr. Inker said.

Michele Gambera, chief economist at Ibbotson Associates, an investment consulting firm in Chicago, points out that “it’s hard to have a stable improvement of corporate profits in an environment where companies are deleveraging.”

It’s also difficult to see profits soaring, he said, while the employment outlook is so weak. Not only does a struggling job market threaten consumer spending, it also exacerbates continuing problems in the financial system. “If people don’t have jobs, they cannot pay off their debts,” Mr. Gambera said.

VALUATION RISK When the market began to rally in March, stocks were roundly considered cheap. Back then, the price-to-earnings ratio for equities was a mere 13.3, based on 10-year averaged earnings, as calculated by Robert J. Shiller, the Yale economist.

But thanks to the recent surge in stock prices, the market P/E has jumped to a much frothier 20.8, versus the historical average of around 16.

“Current market valuations are high enough that they’re more or less suggesting everything is going to be fine this year,” said Robert D. Arnott, chairman of Research Affiliates, an investment management firm in Newport Beach, Calif. But if everything isn’t — if the economy hits a speed bump, for instance, or if corporate profits come in lower than expected — investors may start to question the prices they are paying for risky assets, he said.

This is why James W. Paulsen, who works in Minneapolis as chief investment strategist for Wells Capital Management, says that this year, unlike 2008 and 2009, “it will be important for people to go back to assessing valuations again.”

POLICY RISK Government economic policies are having a huge impact, but they can be tricky to predict. For instance, investors who were banking on imminent health care reform may need to rethink their strategy after the special Senate election last week in Massachusetts.

Health care is only one area that is up for grabs. This year, for example, the government and the Federal Reserve Board will face a big decision on whether to curtail the huge stimulus that has helped prop up the economy.

Mr. Arnott says he believes the Fed will be forced to raise short-term interest rates this year, possibly even before the recovery gains full traction.

The danger is that the markets may react badly to the end of the Fed’s unusually loose monetary policy.

“It’s not like the economy is out of the woods,” said Duncan W. Richardson, chief equity investment officer at Eaton Vance, an asset manager in Boston. “The patient is still in the hospital.”

INVESTORS must also keep in mind that the tax cuts enacted under President George W. Bush — which lowered the maximum rate on long-term capital gains taxes to 15 percent from 20 percent and the top dividend tax rate to 15 percent from 39.6 percent — are due to expire at year-end.

While it is unclear whether the Obama administration will extend those cuts, or at least extend them for the middle class, the uncertainty is bound to raise concerns on Wall Street.

Because of the “potentially big risks that may come out of Washington,” Mr. Richardson said, “investors need to be more diversified than ever.”

Paul J. Lim is a senior editor at Money magazine. E-mail: fund@nytimes.com.

http://www.nytimes.com/2010/01/24/business/24fund.html

Investing: When to bet the farm

Our own personalities add complexity to high-risk situations.

Bill Gurtin of Gurtin Fixed Income Management in San Diego points out the risks associated with overly emotional reactions.

"What you don't want to happen is for people to get emotional with the market," he says.

The more emotional we get, the more likely it is we will make a mistake, Gurtin explains.

A company's business prospects can be measured and evaluated statistically, but there is no easy measure for mood swings.

Before making any moves, people contemplating high-risk investments should come to grips with their emotional makeup and know how they are likely to react.

Yet successful investors take major risks all the time. They succeed because

• they do their research,
• can afford to lose the money they invest in high-risk schemes and
• are able to make up any losses they incur with other investments, which frequently involve complementary or counterbalancing risks.

Whether considering an investment in a stock, a privately held startup or a hedge fund -- all high-risk propositions -- investors should start by digging through the details of the business case to figure out how the return on investment is likely to be generated.

• How big a payoff might the investment produce?
• And how likely is success?

Successful investors look hard at the downside as well.

• What would the price of failure be?
• And how likely is that?

Professionals, even the most seasoned, have the same emotions as everyone else. Learning the ropes professionally does not eliminate human emotion, nor does it elimate urges to buy or sell emotionally. Faced with uncertainties, the tide of emotion surges. How can one resist the surging tide of emotion? Only if one has a framework of disciplines and knowledge within. Controlling emotions and replacing them with the elements of this framework are the secret.

http://myinvestingnotes.blogspot.com/2008/08/investing-when-to-bet-farm.html

Are You Taking Too Much (or Too Little) Risk?

Are You Taking Too Much (or Too Little) Risk?
by Christine Benz
Friday, February 27, 2009
provided by

Assessing a client's risk tolerance--an individual's own assessment of his or her ability to withstand investment losses--is standard practice in the financial-planning world. The Web is full of tools to help investors gauge how they would respond if the market dropped 10%, 20%, or even 50%, and I often hear from readers who tell me that their risk tolerance is "high" or "low."

The basic premise behind getting investors to identify their pain thresholds makes sense. After all, reams of data, including Morningstar Investor Returns, show that investors often buy high and sell low. By identifying their ability to handle losses and avoiding those investments that will cause them to sell at the wrong time, investors should be able to improve their overall return records.

Yet relying disproportionately on your risk tolerance to shape your investments carries its own big risk: namely, that you'll end up with a portfolio that doesn't help you reach your goals because you've been too aggressive or too timid. Instead, risk tolerance should take a back seat to the really important considerations, such as the size of your current nest egg, your savings rate, the years you have until retirement, and the number of years you expect to be retired. Only after you've developed a portfolio plan based on those factors should you consider making adjustments around the margins to suit your risk tolerance.


The Risk of Being Too Aggressive ...

Generally speaking, I'm happy to hear from investors who rate their risk tolerance as "high." These folks' long-term mind-sets allow them to tune out the market's inevitable day-to-day gyrations and weather big losses from time to time--characteristics that usually go hand in hand with profitable investing.

Yet being too aggressive isn't always a good thing. For one thing, it's possible that you're misreading your own risk tolerance and won't behave as you think you will if and when your investments lose money. Studies from the field of behavioral finance indicate that investors' confidence level--and in turn their perceived ability to handle risk--ebbs and flows with the market's direction. Thus, an investor might rate highly his own ability to handle risk at the very worst time--when the market is skyrocketing and stock valuations are high--only to exhibit much less confidence in the event of a market drop. (Not surprisingly, buoyant markets are also when most financial-services firms hawk the riskiest products.)

Moreover, being loss-averse has a foundation in simple math. After all, the stock that drops from $60 to $45 has lost 25% of its value, but it will have to gain 33% to get back to $60. The same cruel math holds for the whole of your portfolio, so it's no wonder that investors are inclined to rate themselves as risk-averse; losses are tough to recover from.

Big losses can be particularly painful for those who are getting close to retirement, because their portfolios have less time to recover from the hit. If you're 30 and your 401(k) balance goes down by 37%--as the S&P 500 did last year--it's a painful but not cataclysmic blow. After all, you might have 30 years or more to recoup those losses, and depressed stock valuations give you the opportunity to buy stocks on the cheap.

By contrast, if you're in your mid-60s and saw your retirement-plan balance shrink from $800,000 to little more than $500,000 over the past year, you don't have as many options. You could continue working to amass more savings or dramatically scale back your planned standard of living in retirement, neither of which is particularly appealing. The bottom line is that there are real reasons to grow more protective of your nest egg as you grow closer to needing your money, and there are real risks to letting your own assessment of your risk tolerance guide your asset-allocation decisions.

... Or Too Conservative

However, with the market dropping sharply over the past year, I'd wager that being too conservative is a bigger risk for many investors right now than is maintaining a portfolio that's too aggressive. Just as investor confidence improves as stocks march upward, so does pessimism take over when stocks are in the dumps.

Yet anyone tempted to make his portfolio more conservative should ponder a real risk of that tactic. By avoiding stocks and sticking exclusively with "safe," fixed-rate securities such as CDs or short-term Treasuries, you also put a cap on your portfolio's upside potential, which in turn heightens the risk of a shortfall come retirement. True, stocks have greater loss potential than do short-term fixed-income investments, but they also have the potential for greater gains. Moreover, the gains from short-term, high-quality investments are pretty darn skimpy right now: You're lucky to earn 3% on a one-year CD.

That might not sound terrible. After all, the S&P 500 Index has lost about 3%, on an annualized basis. Yet while inflation is currently minimal right now, it won't always be so benign. In fact, inflation has the potential to gobble up most, if not all, of the return you earn from any fixed-rate investment. The upshot? For retirees, pre-retirees, and 20-somethings alike, hunkering down in safe, fixed-rate investments is a luxury you probably can't afford, even if it helps you sleep at night. To help offset the effects of inflation, you need to have at least part of your portfolio in stocks, whose returns have the potential to outstrip inflation over time.

Just Right

So if it's a bad idea to let your gut guide your stock/bond mix, what should you do? Your key mission is to let hard numbers--rather than your own comfort level--be the chief determinant of your asset-allocation plan. Employ an online asset-allocation tool, such as Morningstar's Asset Allocator, to help you optimize your asset allocation based on your goals, your savings rate, and the number of years you have until retirement. Alternatively, you could hire a financial advisor for even more customized help or look to the asset allocations of target-maturity funds for back-of-the-envelope guidance. (David Kathman discussed how to do that in a recent The Short Answer column.)

Once you've put your basic asset-allocation framework in place, it's fine to make some adjustments around the margins based on your own comfort level. For example, if you determine that you should have the majority of assets in equities, you could focus on underpriced large-cap stocks or invest with a stock-fund manager who places a premium on limiting losses. On the bond side, you could limit your portfolio's risk level by going light on more-volatile asset classes like high-yield bonds and sticking with high-quality short- and intermediate-term bonds.

Beyond these small adjustments, it's a big mistake to let your emotions--and that's essentially what irrational risk aversion is--drive your portfolio planning. If the market's ups and downs leave you with excess nervous energy to burn, focus on factors you can actually influence, such as improving your security selection and lowering your overall investment-related and tax costs.

http://finance.yahoo.com/retirement/article/106656/Are-You-Taking-Too-Much-or-Too-Little-Risk;_ylt=AgJi2m23enNuwutOjND70J5O7sMF?

Safe and Risky Investments

Safe and Risky Investments

Joe Conservative hates risk and is terrified of the prospects of losing money. He is strictly a bank CD man, being highly suspicious of the stock market. His girlfriend, Rita Riskaverse, doesn’t like risk either, but she studied investments in college and knows something about the relationship between risk and return.

Joe and Rita eventually get married but decide it makes sense for them to handle their investments individually. Joe puts $100,000 in a bank certificate of deposit earning 6% annually, while Rita spreads her $100,000 equally across five stocks, putting $20,000 in each one.

Twenty years later the two lovebirds decide to do some joint financial planning, which requires them to disclose the performance of their personal investment accounts.

Rita does some calculations on the performance of her five stocks. She tells Joe “I had one stock go bankrupt, two that earned less than your 6% from the bank, one that earned 8%, and one that earned 12%.”

Joe responds, “I told you the stock market was too risky. You should have listened to me.”

Suppressing a smirk, Rita shows Joe the data below.

----
Joes’s Bank CD:
$100,000 x (1.06)^20 = $320,714

Rita’s Stocks:
Stock A: worthless $0
Stock B: $20,000 x (1.03)^20 = $36,122
Stock C: $20,000 x (1.05)^20 = $53,066
Stock D: $20,000 x (1.08)^20 = $93,219
Stock E: $20,000 x (1.12)^20 = $192,926
Total = $375,373
----

Joe can’t believe it. Rita had one stock go under, two that were below-average performers, and two that did okay but certainly didn’t set the world on fire. It seems like luck to him that her portfolio is worth more than his – although he can’t put his finger on what was lucky. It just doesn’t seem fair.

Help for Mounting Losses

Help for Mounting 401(k) Losses

by Walter Updegrave
Thursday, November 27, 2008

Question: I'm retired and my 401(k) has lost approximately 35% over the past year. My financial adviser tells me to stay the course, but the losses keep mounting. What should I do? -Dale Marcos, Lafayette, Indiana

Answer: For starters, you should demand a better answer from your financial adviser. Just telling someone to "stay the course" isn't an adequate answer any time an investor expresses doubt or confusion about an investing or planning strategy, and it's certainly not an acceptable reply given the virtually unprecedented turmoil and uncertainty we're experiencing today.

More from CNNMoney.com: • How to Bet on Emerging Markets • 4 Lessons From the Financial Crisis • Whatever You Do, Don't Buy Sears

You can't blame your adviser for not foreseeing the severity of this downturn before it occurred. Nobody's crystal ball is that clear. But an adviser, or at least a good one, is supposed to help you create an investing strategy and retirement plan that can see you through a variety of economic and market scenarios.

Your adviser can't immunize you against losses altogether. That would be unrealistic if you also want your retirement savings to grow and support you for the rest of your life. But the plan should balance upside potential with some measure of downside protection that makes sense given your age, risk tolerance and your financial resources.

Most important, your adviser should be willing to get together with you in times like these to go over the plan, see if it's working as expected and discuss whether or not it needs to be revised.
On the face of it, a 35% decline over the past 12 months seems a bit much for someone who's retired. Given that stocks are down about 40% over that period and the broad bond market is flat to slightly up, that suggests a stock allocation somewhere between 80% and 90%. That strikes me as pretty risky for a retiree. But without more information about your overall finances - like whether the decline you cite includes withdrawals, what other investments you own and how heavily you'll be relying on your 401(k) for living expenses - I can't say for sure whether your 401(k) is invested too aggressively.

Ask for More Transparency

Whatever the particulars of your situation, this much is clear: You are upset about the performance of your account and you aren't getting enough feedback from your adviser to know whether the path he wants you to stay on is the right one.

Here's what I recommend. Go back to your adviser and explain that you need to know what course it is exactly that you are on and why you should stick to it. I'd ask to see how my portfolio is divvied up between stocks and bonds (as well as among different types of stocks and bonds) and I'd want an explanation of why that allocation makes sense given today's conditions.

I'd also want to see some sort of analysis that shows how much income I can reasonably expect throughout retirement from my investments, Social Security and pensions, if any, and how that income compares to my projected living expenses.

Move On

If your adviser can't or won't do this, you have two choices. You can take this kind of comprehensive look at your retirement finances on your own by revving up an online tool like Fidelity's Retirement Income Planner or T. Rowe Price's Retirement Income Calculator.
Or you can switch to an adviser who is willing to do this type of assessment for you. If you do move on to another adviser, be careful. There are lots of people with impressive-sounding credentials who really operate more as a salesman than financial adviser, looking to take advantage of fearful investors in uncertain times like these. To find a reputable adviser, search the Financial Planning Association Web site or the Garrett Planning Network.

Who knows, maybe your adviser has already revisited the advice he or she gave to you and other clients and crunched the numbers again. Perhaps that's why your adviser can so confidently tell you to stay the course. But if I were as worried as you seem to be, I'd want more convincing (and maybe a look at some alternatives) before I went along.

E-mail Updegrave at wupdegrave@moneymail.com.
Copyrighted, CNNMoney. All Rights Reserved.

http://finance.yahoo.com/focus-retirement/article/106216/Help-for-Mounting-401(k)-Losses;_ylt=ApmNvqTpXRlKoIp6cJnk1T67YWsA?mod=retirement-401k

Investing: When to bet the farm

http://articles.moneycentral.msn.com/Investing/StockInvestingTrading/InvestingWhenToBetTheFarm.aspx#pageTopAnchor


Investing: When to bet the farm

Big payoffs often require big risks. Bet wrong, and you could lose everything. Do you have what it takes? And how do you assess whether a dicey investment is worth it?

By Annie Logue, MSN Money
You want a big return? How big a risk do you want to take to get it? Gauging the risks associated with really promising investments, and handling those risks appropriately, can change your life.
"It's never safe to take a risk, by definition," says Carl Luft, an associate professor of finance at DePaul University in Chicago.
Yet successful investors take major risks all the time. They succeed because they do their research, can afford to lose the money they invest in high-risk schemes and are able to make up any losses they incur with other investments, which frequently involve complementary or counterbalancing risks.Whether considering an investment in a stock, a privately held startup or a hedge fund -- all high-risk propositions -- investors should start by digging through the details of the business case to figure out how the return on investment is likely to be generated. How big a payoff might the investment produce? And how likely is success?
Successful investors look hard at the downside as well. What would the price of failure be? And how likely is that?

Just jump in and take a risk
And what about all the outcomes in between?
Luft emphasizes that successful investors tend to have a broad view, taking the downside into account with the upside. They plan on an outcome somewhere in the middle of the range of possibilities. That is their "expected return."
"An expected return is an average," Luft says. "It's the probability of all of the outcomes."
Risk assessment gets pretty sophisticated at risk-oriented hedge funds. These funds combine and counterbalance risks to put together exotic investment strategies that increase an investor's upside while controlling the downside -- all for a price. But the basics are just common sense.
Russell Lundeberg, the chief investment officer for Barrett Capital Management in Richmond, Va., spends his days researching investments both risky and safe for the wealthy families in the firm's client base. He researches basic business practices as well as the big-picture business opportunity.
"The No. 1 most overlooked aspect of hedge fund due diligence is on the operational side," he says. "The things that can be potential risks and pitfalls are not always easy to spot."
Among the not-so-obvious business risks, Lundberg mentions high employee turnover, sloppy accounting and computers that aren't backed up. A mistake in the office can wipe out an investment's potential return even in the most promising environment, Lundeberg says.
Our own personalities add complexity to high-risk situations.
Bill Gurtin of Gurtin Fixed Income Management in San Diego points out the risks associated with overly emotional reactions.
"What you don't want to happen is for people to get emotional with the market," he says.
The more emotional we get, the more likely it is we will make a mistake, Gurtin explains.
A company's business prospects can be measured and evaluated statistically, but there is no easy measure for mood swings. Before making any moves, people contemplating high-risk investments should come to grips with their emotional makeup and know how they are likely to react.

Graphic: Three ways to analyze a company (Quantitative, Qualitative and Technical Analysis)
Where risk is high, the investor needs to analyze his or her life situation.

Is financial risk really risky?
"There are times in your life when it's appropriate to take different levels of risk," Gurtin says.
Age is a big factor. Age changes us in a lot of ways. We gain emotional maturity. At the same time, the nature of our financial obligations changes, and the time horizon for risk gets tighter.
"Let's say you're young, in your mid-20s," Luft says. "If you take a big risk and something goes wrong, you have time to recover." On the other hand, the middle-aged homeowner probably needs a bigger safety net, especially if there are kids who need braces or there are college costs to consider.
Even a high-risk investment can be a very positive part of a portfolio when it's appropriate to a person's situation and is well-managed.
"In investing and in life, you have to look at everything on a risk-and-reward basis," says Manny Weintraub, the president of Integre Advisors, a New York firm that manages equities for long-term growth. "Volatility is not the end of the world."

Risk lesson from the OTB
Weintraub is a good example. He left the investment firm of Neuberger Berman in 2003 to start his own firm. He knew most new businesses fail, but he had a lot of confidence in his own investment skills. If the business went under, he reasoned, he could always get a job with another firm.
"Careers are actually the easiest place to take risks, as long as you don't burn your bridges," Weintraub says.
Luft suggests younger investors, particularly, should be ready to gamble with their careers. But in the same breath he cautions as professional investors often do: Risk only as much as you can afford to lose, he says.

Published Aug. 28, 2008

Assessing Investment Risks using B-FLExCo

This is how I assess investment risks of the companies that I wish to invest in. I have shortened this to B-FLExCo.

This abbreviation stands for:

B = Business risk
F = Financial risk
L = Liquidity risk
Ex = Exchange risk
Co = Country risk (Also, known as political risk)

At the moment, there is significant political risk for those investing in the KLSE. Accordingly, many KLSE counters are trading at a discount reflecting this risk and other prevailing risks.