But, for most retirees, trying to avoid risk by not investing is a terrible decision. It's a decision to give up on your dreams. When you come to understand that all the different kinds of investment risks which we will describe have been irritating investors throughout the history of free market capitalism, you will begin to see that risk is just a reality that needs to be managed.

Farmers learn to cope with dramatic weather changes. Retailers must adjust to radical changes in fashion. Aerospace engineers are continually pushing the frontiers of materials strength. Yet, despite inevitable setbacks, all these professionals keep achieving wonderful successes.

And so it is with investment managers. Our professional challenge is managing perpetual uncertainty. When we make decisions to invest in a company's stock, there is a chance that its leading product might be broadsided by a new invention. If we buy a government bond, we do not expect that country's credit to be suddenly downgraded... but it could. If we invest money in a mutual fund, we are making a commitment to a certain manager's investment style... which could always go out of favor.

In each case we are acting on a particular conviction about the future ... about a company's likely success in its market ... about the growth of consumer spending ... about a nation's currency and its fiscal policy ... about a business sector's growth prospects ... or about the valuation of stocks in general. But the future is always unknown. Always! In a global economy as dynamic and multi-faceted as ours, there will be constant surprises, some good and some not so good.

Because the risk of disappointment is ever-present, we believe long-term investment success requires:
a) Emphasizing highest convictions about the future, derived from continual research
b) Making diversification an unwavering commitment
c) Focusing on fundamental value; not overpaying
d) Being adaptable when the future unfolds differently than expected

Different Kinds Of Investment Risk
At FAI we find it helpful to sort investment risks into five distinct categories. Each has unique characteristics. And they tend to be more or less threatening in different economic environments.

Fortunately, not all investment risks are prominent at the same time, so our defensive emphasis needs to shift over time depending on which kind of risk is ascendant. And, sometimes the market fully recognizes a risk by discounting the prices of securities that are most exposed to it; in such cases, a risk can actually become an investment opportunity!

Here is a brief description of the five kinds of risk. We will elaborate later and describe our portfolio disciplines for managing each variety of risk.

1) INFLATION RISK, i.e. the probability that the currency in which we measure our incomes, debts and assets will lose value (buying power) over time. Persistent inflation is a compelling motivation for even risk-averse savers to expose at least part of their nest egg to price risk in the expectation of realizing inflation beating returns over time.

2) ISSUER RISK. There is always some possibility that a government or company which issued bonds might not make interest or principal payments as promised; or that a business in which you own shares might fall on hard times. In either case, a price decline would be a normal consequence of the issuer's changed condition.