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Feb 8, 2007 5:14 am

I like that; turn it around, and show them the what can happen if you don't take any risks (grow poor safely).

Looney brings up a key point. Slim2, you can point out that inflation is just one other form of risk, there are all kinds of risk: inflation risk, interest rate risk (up or down). Individual security risk can be removed by using mutual funds. There geopolitical risk, the risk that you will live too long and run out of money. Risk comes from all directions. Sometimes, we deal with risk (a threat) with "fight or flight". Our brains are wired to act emotionally. Your training and experience as an advisor allow you to help the client act rationally and effectively to the various threats posed by "risk".

Feb 8, 2007 6:08 am

[quote=planrcoach]

I like that; turn it around, and show them the what can happen if you don’t take any risks (grow poor safely).

Looney brings up a key point. Slim2, you can point out that inflation is just one other form of risk, there are all kinds of risk: inflation risk, interest rate risk (up or down).

[/quote]

The way I explain risk to people is by doing it the way insurance companies do.

We talk about Possible Maximum Loss x Probability of Max Loss, and then we talk about probable losses and so forth.

I introduce the concept of  portfolio drawdowns  and discuss what would be the probable max drawdown in a portfolio with a given asset allocation.

I explain that inflation results in a sure thing loss, the PML is low (only 2-3%) but the P(loss) is 1. Therefore in managing money we strive to do better than inflation, and better than the risk free rate.


Feb 8, 2007 6:40 am

Easy- Uncertainanty regarding loss. Thats it.

Feb 8, 2007 5:28 pm

[quote=MStyle88]Easy- Uncertainanty regarding loss. Thats it. [/quote]

That easy is it?  Then everyone should have a bank certificate of deposit.   You can't lose any principal there.

Feb 8, 2007 7:34 pm

Or penny stocks, that way you've taken the uncertainty out of the mix. You ARE going to lose ALL your money!

Mr. A