Four ways to safeguard your investment from catastrophe
Worthy assets, solid sectors, portfolio construction and diversification are keys for success
The primary objective in investing is to deliver the best risk-adjusted returns possible. Since return and risk are two sides of the same coin, an interrogation of one without a full understanding of the other is meaningless (and dangerous). Returns are easy to calculate; risk is an enigma. In financial theory, risk is typically defined as volatility. This is because our industry is full of highly numerate people — and for the person with a hammer, every problem looks like a nail. Volatility is a number that can be calculated; a hard fact. In truth, the risk of losing money is often highest at times when volatility is low and complacency abounds. A Minsky moment refers to the risks that bubble under the surface in extended periods of prosperity. In this environment, asset values typically rise. This often leads to increased confidence, which then fuels speculation and increased levels of leverage. Good recent examples of this include the US housing bubble and the commodity bubble. O...
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