In this episode on the Wilson Wealth Management YouTube channel, we continue our look at the Investor Profile. The focus in this session is on an investor’s risk tolerance and working to become a more rational investor.
Your level of risk tolerance plays a significant role in your investment portfolio’s target asset allocation. So your personal risk appetite must be understood if you wish to create an optimal portfolio. Specifically:
What “visceral” aspects of your personality and lifetime experiences impact risk tolerance?
Investment risk, expected returns, time horizon, and funding your portfolio. How do the interrelationships between these factors play a part in the level of risk you may want to assume?
How do Investor Psychographic Models, like the Bailard, Biehl, & Kaiser Five-Way Model, help you better understand your current risk profile? And perhaps provide ideas on how to shift boxes?
What is meant by a more “rational approach” to risk? Why should this be your goal?
In episode 7 on the Wilson Wealth Management YouTube channel, we look at systematic risk and its impact on your investment analysis and portfolio.
Systematic risk is the complement to nonsystematic risk, which we reviewed in episode 6. Together, they are components in assessing investment risk and creating strong standard deviation risk measures.
What is systematic risk? Also known as market or non-diversifiable risk.
How does it differ from nonsystematic risk?
What are the key systematic risks?
Why is it important for investors, and businesses, to understand these risks and their potential impact on portfolio assets?
How do businesses and investors manage systematic and nonsystematic risks?
In episode 5, we saw how standard deviation is used as an objective, statistical measure of investment risk. That is the quantitative side. Number crunching.
To assess the qualitative aspect of an asset’s risk, and to better build the standard deviation, investment risk is usually broken into two components. Nonsystematic and systematic risks.
In this episode, the focus is on the nonsystematic risk factors.
What is a nonsystematic risk? Also known as asset specific or diversifiable risk.
What are the key nonsystematic risks?
How should investors analyze these risks?
Why is it important to factor these risks into your business and investing decisions?
Episode 5 on the Wilson Wealth Management YouTube channel looks at standard deviation as an objective measure of investment risk.
Comparing investment risk between assets is difficult. There are so many different asset classes, subclasses, geographies, capitalizations, maturity dates, etc. Each with its own unique risk-return profile and factors.
Assessing investment choices becomes an “apples to oranges” proposition.
So how do investors turn analysis into “apples to apples” comparisons?
Through the use of standard deviations. This statistical measure, as well as risk-return ratios utilizing standard deviation, help investors more objectively compare highly varied assets.
In this episode, we look at this concept, some common risk/return ratios, and limitations in using standard deviation as a risk measure.