Stableford Capital Insights

What is Risk Management: Factoring in the Market

What is Risk Management businessman with growth cloud

When it comes to asset protection, you’ll find several different strategies utilized in the financial world. Some investment advisors think the financial market is random. They embrace the randomness and it’s potential for big wins. Others think the market is more cyclical. They take risk management more seriously and prefer tried and true strategies over the newest information or fad. Asking the question, “ what is risk management in terms of my specific investments?” is more important than ever given the volatility of the market. So how do you know what works best? Can success in the market really be attributed to variance and pure luck?

What is Risk Management

When working with finances and asset protection, risk management refers to identifying, analyzing and accepting (or minimizing) the uncertainty in investment decisions. The investment advisor uses risk management to figure out the potential losses of an investment, which will then help determine if the risk of losses is worth the potential gains.Think of it this way: you can’t look at an investment only by the odds of it increasing in value, you also have to consider the payoff of the increased value, as well as the cost of the value dropping. So an investment in something unlikely to increase much in value could actually be a wise choice IF the potential for payoff is large enough and the likely losses are small.

Factoring Randomness into a Risk Adjusted Return

The high payoff/low risk opportunity is why an investment advisor adjusts strategy to factor in risk, as well as randomness. Even though something has never happened, doesn’t mean it won’t. According to Nassim Nicholas Taleb, author of Fooled by Randomness, “we never know things for sure, only with varying degrees of certainty.”It’s totally possible to find yourself doing well in a random market situation. By all means, keep doing what's working and benefiting from randomness! But be sure to limit your downside – the key to asset protection.On the flip side, it’s important to note that there is also nothing wrong with losing. It’s only a problem when you lose more than you planned to lose. This is why risk management is essential to establishing clear rules that limit your downside.

Choose an Investment Firm with a Time-Tested, Long-Term Approach

How you incorporate the randomness of the market into your investment strategy depends on your risk tolerance – what degree of variability you are willing to take on your investment returns. Rather than relying on randomness, it’s more effective to follow a couple key strategies for long-term market success.

  • Look for global changes rather than local, and an overall trend over the latest fad. Randomness can cause an outlier - and skew a
What is Risk Management visual with stock market graph
  • ‘zoomed-in look’ at the market – be sure to ‘zoom out’ to look at the overall trend.
  • Seek out distilled information – that is, concepts and research that have gone through the ringer, that have been rigorously analyzed and that have proved to stand the test of time. Keep in mind that a concept has to be worthy to last. Distilled information stands the test of time.
  • Ignore the latest “cutting edge” news and editorial or reactionary opinions; most new ideas will not last.
  • Seek repetitive, skilled strategies over randomness. If you can’t repeat it, it’s random, not skilled.
  • In randomness, strategies may work well in the short term but are not ideal for the long term. They simply aren’t stable enough for the long haul and will fail over time.

Stableford addresses the “what is risk management” question clearly with a financial philosophy that cannot be emphasized too much. The keys to successful long-term investing are to manage the risks within specific return profiles; focus on capital preservation; and be responsibly pro-active, tactical and data driven. If you’re still unclear on how to filter randomness from an overall strategy, or you’d like to learn more about Stableford’s philosophy, contact a Stableford investment advisor today at 480.493.2300.

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July 8, 2024
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by Stableford Capital
Andrew Brinkman
Andrew J. Brinkman is the Founder of Stableford Capital. Over the course of his 45+ year career, he built A.J. Brinkman & Co., a leading foreign exchange arbitrageur and institutional floor broker, was a managing partner of Petros Capital, a long/ short institutional hedge fund and, for the past ten years, he has been a discretionary asset manager for high net-worth families. Andrew Brinkman has been a member of the Chicago Mercantile Exchange, the New York Futures Exchange, and the Chicago Board of Trade. A 1978 graduate of Cornell College with degrees in Economics and Political Science, he was a board member for ChildHelp USA, a board member of the Berry Center for Economics, and former trustee of Cornell College.