Looking at this plot,
specifically the area under the curves,
and seeing how they are very similar,
i wonder whether most folks would be
- happier investing mostly in gold/gold-backed assets
- and using NIFTY50 to hedge some of the risk’s associated with a gold portfolio.
Risks like 3, 7, 15, 20, 24 of this list…
24 Types of Risk
- Losing money – The possibility of permanent loss is the main form of risk.
- Falling short – Not having to make necessary payouts or income to live on.
- Missing opportunities – Not taking enough risk.
- FOMO (Fear of Missing Out) – Jumping on the bandwagon of risky investments for fear of living with envy.
- Credit – The risk that a borrower will be unable to pay interest and repay principal as scheduled.
- Illiquidity – The inability to sell when you need the money.
- Concentration – The risk of not being diversified when sectors drop in value.
- Leverage – Losses are magnified when investments decline in value by using borrowed money.
- Funding – The need to make a capital call when a loan comes due.
- Manager – The risk of picking the wrong one.
- Overdiversification – The standards of inclusion may drop leading to the potential of lower risk-adjusted returns.
- Volatility – This introduces an emotional component that may result in a permanent loss from selling too soon.
- Basis – This applies to arbitrageurs who go long one security and short another based on one being cheaper than the other and common patterns repeating themselves and yet something goes awry where the relationship breaks.
- Model – Excessive belief in a model’s efficacy can lead to excessive risk taking.
- Black Swan – Just because something hasn’t happened doesn’t mean it won’t happen. This is the statistically inconceivable event that materializes.
- Career – If rewards are shared asymmetrically then it may not be in a money manager’s best interest to take risks where there could be short term pain, but long-term pain for fear of losing clients or his or her job.
- Headline – This is when losses are big enough that they can potentially generate media attention.
- Event – Tends to apply to bondholders when the equity owners leverage up the company and put the bonds at more risk.
- Fundamental – Assets or companies underperform in the real world.
- Valuation – Overpaying for an investment.
- Correlation – Being less diversified than expected. Everything goes down much to the surprise of an investor.
- Interest Rate – The risk that higher rates can lower the value of fixed income securities and other yield-oriented investments.
- Purchasing Power – The risk that cash received in the future will be eroded in value due to inflation.
- Upside – The risk of being under-exposed to very good economic and financial events that occur in the future.
Source : Howard Mark’s “Risk Revisited Again” memo .
Thoughts? 