Internal Risk

Modern Portfolio Theory suggests investors should maximise their expected return for a given level of risk. Conversations about what someone should do with their money start with “risk appetite”. The basic belief is “no risk, no reward”. Investments have no opinion whatsoever on the investor’s risk appetite. What determines whether you get rewarded (in the long run) is whether the investment added value. The challenge is there is enough noise to cloud a lifetime. There will be Corporate Zombies and Market Mavericks richly rewarded for a valueless working life. Look through that noise. I am very risk averse. Yet some of my choices would create a lot of anxiety in others. The Volatility (ups and downs relative to averages), Drawdowns (scary falls), and Opportunity Costs (stable acceptable alternatives) make my long-term preference for almost full investment in Global Equity look risky. Risk isn’t a number. It is a conversation. A money conversation should start with you and your world. It should start with your foundation. Your security. But that is a conversation about you. Your capacity. Your understanding. Risk conversations about investments can’t be summarised into single numbers. And are detached from you. Real risk management is internal.