Different Flavors of Risk
by Charles Cheng, CFA
Rapid declines in recent weeks for previously strong performing assets like crypto currencies and certain information technology companies has highlighted the inherent riskiness of markets. Month to date, the Taiwan TAIEX index is down -8.2%, after a relative surge in COVID-19 cases, with the speed of the market decline blamed on margin trading. While in overall percentage terms, major market indices are relatively stable and no broad index has entered bear market territory, there are undoubtedly investors who are taking painful losses on their portfolios, particularly those trading with leverage. Different investors handle and measure investment risk differently, with some measures being more useful than others. We think it is worthwhile to revisit some practical ways to look at risk on a personal level.
近幾週來，諸如加密貨幣和某些IT公司等前段時間表現強勁的資產迅速下跌，突顯了市場固有的風險。 自新冠確診案例激增，從上個月至今，台灣TAIEX指數下跌了8.2％，而這波市場下跌之快應歸咎於保證金交易。 儘管從總體百分比來看，主要市場指數相對穩定，沒有大指數進入熊市區域，但無疑有一些人正在承受其投資組合損失的痛苦，尤其是那些進行槓桿交易的投資者。 不同的投資者對投資風險的處理和衡量方式有所不同，有些措施比其他措施更有用。 我們認為值得重新審視一些從個人角度看待風險的實用方法。
1) Risk of permanent loss of capital within the investment
This is the risk that either all or most of the capital that you have invested does not come back to you. If you buy the shares or corporate bonds of a company, and that company goes out of business, you will not get the money that you invested back, regardless of how long you held the shares or the bond. Another example would be of a structured investment product that would pay off if a certain event occurs but lose money if it did not, or an extremely speculative asset that has risen to levels that it is unlikely to sustain at any time horizon. This is a risk even for well researched investment ideas, because of the threat of random events like natural or accidental man-made disasters.
這種風險是指您將永久性損失已投資的全部或大部分資金。 如果您購買的股票或債券的公司倒閉了，那無論您持有該股票或債券的時間長短，您都無法回收您投資的資金。 另一個例子是結構性(條件性)投資產品: 如果某個特定事件發生，該投資將獲得回報；但如果沒有發生則虧損。 亦或者是一種極具投機性的資產，其價格已上升至在任何時間範圍內無法持續維持的水平時產生的損失。 即使是對於經過深思熟慮的投資想法也是一種風險，因為自然事件或偶然的人為災難等隨機事件都將帶來威脅。
The best way to mitigate this particular risk is through diversification. For each investment that is dependent on a certain outcome, such as a company remaining in business, you limit the capital invested to a manageable percentage of the portfolio. Care must be taken to ensure that several different investments in your portfolio are not dependent on the same outcome. For example, a portfolio invested in multiple heavily leveraged real estate companies would not protect you from a dramatic collapse in property prices.
減輕這種特殊風險的最佳方法是要做到資產配置多元化。 對於每項取決於特定結果的投資，例如公司持續在營業中，那您可以將投資額限制在投資組合的一個可管理百分比內。 必須注意確保投資組合中的幾項不同投資是不依賴於相同的結果的。 舉個例子，在多個槓桿率高的房地產公司中進行大量投資的投資組合併不能保護您免受房地產價格急劇下跌的影響。
2) Path dependent return risk
Permanent loss of capital can even occur if the investment does not suffer permanent impairment itself. This is because investors are often forced to realize losses, whether through financial or psychological pressures. For example, the index of the global stock markets, the MSCI World Index, lost over 50% of its value between October 2007 and February 2009. Holding this index through this drawdown to present day would have resulted in strong investment returns over the entire period. However, an investor who had leveraged his portfolio through margin trading, would likely have been forced to realize a loss by his broker. Similarly, an investor who either could not take the pain of losing over 40% or needed to liquidate his holdings to meet other financial needs would have lost his capital permanently. Even for investors who do not need to sell, having large unrealized losses can have adverse effects on his behavior in investing and in other areas of life, like emotional stress.
如果投資本身未遭受永久性貶值，也是有可能發生資本永久性損失的。 這是因為投資者經常因財務或心理壓力被迫套現虧損。 例如MSCI世界指數在2007年10月至2009年2月之間損失了其價值的50％以上。 如果在當時一直持有該指數到今天，那麼整個投資時期內會給投資者帶來強勁的投資回報。 但是，通過融資交易的投資者可能迫於經紀人追補保證金的壓力而斷頭受損。 同樣，如果一個投資者不能承受資產跌幅超過40％的痛苦，或者需要清算其持有的資產以滿足其他財務需求而變現時，那他的資金將永久性地損失。 即使對於不需要套現的投資者而言，未變現的帳上巨額虧損也可能對他的投資行為和其他生活領域產生不利影響，例如情緒壓力。
The way to avoid this kind of risk is to have an awareness of an investment’s or a portfolio’s potential movements before capital is committed, so that any unexpected paths that the price can take will not turn you into a forced seller. This awareness can be achieved through careful study of the price movement of the investment or similar types of investments throughout history.
3) Risk of not meeting your objectives
Even without suffering a severe capital loss, investors who make the wrong decisions are at risk of not meeting their personal or professional objectives for investments. This can be about reaching a certain level of returns in order to reach one’s financial or long-term spending goals, or simply having one’s wealth outpace the rate of inflation. One could have either a mix of assets that is either too conservative in returns (such as having a too high allocation in cash) or too risky for a particular time horizon. An example of the latter scenario would be needing a capital to meet a spending need within the next two years, like needing a minimum level of capital to buy a house or pay university tuition, but then putting it in a portfolio of stocks that could go up or down 20-50% in any given year.
即使沒有遭受嚴重的資本損失，做出錯誤決定的投資者也有無法實現其個人或專業的投資目標。 這可以是為了追求財務或長期支出目標而達到一定的回報水平，或者僅僅是使自己的財富超過通貨膨脹率。 一個人可能擁有的資產組合要麼在回報率方面過於保守（例如現金分配過高），要麼在特定時間範圍內風險太大。 後一種情況的一個例子是，需要資金來滿足未來兩年內的支出需求，例如需要頭期款來購買房屋或支付大學學費，但將資本放入在任何一年中升降幅約為20-50％的股票中。
Taking these concepts together, a sensible course of action would then be to: 1) Take enough risks to meet your long-term investment objectives. 2) Don’t make any bets that result in permanent impairment of capital that you can’t come back from, like in an overleveraged volatile asset. 3) Stick to an investment plan that will keep you consistently invested in the markets no matter what volatility or crises may happen.
綜合考慮這些概念，明智的行動方針將是：1）承擔足夠的風險以滿足您的長期投資目標。 2）請勿進行任何可能導致永久性資產損失的押注，例如過度槓桿進行高波動產業的投資。 3）堅持某個能讓你在無論發生任何波動或危機時都能持續投資於市場的計劃。
This article reflects the personal views of the author and not any firm’s and should not be viewed as an investment recommendation.