Many financial planners and investors use one or more of the following definitions of risk:
-
Possibility of harm
-
Market volatility
-
Loss of capital
-
Possibility of loss
-
Below benchmark returns
-
A potential threat
-
Standard deviation
-
Negative surprises
How Do These Definitions Make You Feel About Your Ability To Deal With Risk?
Do they empower you, make your job easier,and give you and your risk management abilities a better sense of control? Or do they make you feel that you have little or no ability to manage such phenomena?
These definitions of risk may not empower us because they describe the results of risk versus defining them. Volatility, loss, variations in returns, negative surprises, harm and negative consequences don’t happen in a vacuum. Something causes them, so they become secondary, or in some cases, even tertiary results of actual risks manifesting themselves.
Medical students learn early in their professional training the critical importance of treating the underlying disease rather than the symptoms.
As financial planners we need to focus first on the risks themselves, not the results of the risks. We must first identify the risks, then successfully avoid, prepare for, neutralize or manage the risks so the results of those risks occurring are either prevented from occurring or dramatically reduced.
A truly empowering, practical definition of risk comes not from the investment world, but from Peter Oppenheimer, former chief financial officer, and one-time chief risk officer of Apple,Inc.:
“The degree to which an outcome varies from our expectations”