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  1. #1
    Membaa
    Join Date
    Nov 2004
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    Default Assessing and managing portfolio risks

    We have recently had a situation where ‘risk’ has been the topic of discussion. Sadly that was shut down by optimists who focused only on likelihood which they assessed as ‘unlikely’, and therefore chose to ignore consequence.

    Imho portfolio management must focus on risks as much as rewards.

    In order to do so risks have three elements: 1. what could possibly go wrong. 2. What is the likelihood of the risk eventuating. 3. What is the consequence of the risk eventuating.


    Good risk assessment cannot ignore any of those three elements. The tendency however is for optimists to wade in and debunk the risks by arguing that the likelihood is so low, that consideration of the risk in itself, is therefore irrelevant, as the risk is inconsequential.

    What these optimists do not put forward in their argument, typically, is what the consequence is, that is somehow inconsequential, in light of their argument that the risk is of low likelihood.

    Good debate on investments imho should always consider the risks of investment.

    This cannot be achieved without good risk assessment practices. Smart investors should not be swayed by commentary from vested interests (typically holders), that refuse to examine consequence, and seek only to debunk likelihood.

    If we don’t assess the risks of investment, we cannot manage those risks, except retrospectively. Usually that’s too late to do anything materially significant, except get out and probably in a panic.

    There are better approaches for the more reasoned and informed, especially those who look at risks and how they will respond, in advance of them potentially occurring. For example, avoid the risk, ameliorate the risk, treat the risk, avoid the risk, manage the risk.

    None of this happens if one does not choose to apply simple risk assessment techniques, of which identifying potential risks is one, assessing likelihood is another, and importantly considering the consequence, which is key.

    If one gave a metric to each of the measures of likelihood and consequence of identified risks, as is good practice in risk assessment and management, then they are better informed to determined their ‘treatments’ or responses, to those risks, should they arise.

    If this thread gets some legs, I'll show you how to identify risks and put measures against likelihood and consequence, and assess them, so that you can get some perspective on what constitutes real or perceived risks and whether or not you should be concerned about them.


    If risks do eventuate, then they become issues, and issues are managed differently from risks, but the informed are better prepared than the uninformed to mange those issues.

    BAA
    Last edited by Baa_Baa; 20-04-2017 at 07:55 PM.

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