The Risk-Wise Investor E-Book

Michael Carpenter

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Global Finance Executive Select
• Sprache: Englisch

Seitenzahl: 431

Veröffentlichungsjahr: 2009

Beschreibung

User-friendly risk management tools, tips, and techniques for a less certain world Though a very high level of investor uncertainty, anxiety, and concern about risk now exists, the vast majority of investors do not genuinely understand investment risk-let alone how to effectively manage it. The Risk-Wise Investor offers a totally new, user-friendly, non-technical way to help you better understand and manage uncertainty and risk. This practical guide will help investors avoid many common pitfalls and make well informed, knowledge-based decisions when facing uncertainty and risk. It also shows how to implement a personalized, systematic risk management planning process that will allow you to manage the risks you face more effectively and improve the likelihood of achieving specific investment goals. Though traditional investment advice is based on taking the long view and diversifying portfolios, the information here shows how to incorporate additional risk management considerations into your plans. The Risk-Wise Investor also provides innovative insights that will help investors and their advisors better understand how to: * Gain a practical, user-friendly, knowledge based understanding of risk and risk management * Better understand and manage financial uncertainty and rapid change * Release life-risk management skills in the world of investments * Become less anxious, more knowledgeable, realistic, and potentially more successful investors * Learn a new "empowering" definition of risk to more effectively address risk and uncertainty * Help reduce the likelihood and potential impact of negative surprises

Leseprobe

Table of Contents

Praise

Title Page

Copyright Page

Dedication

Preface

User-Friendly Risk Management

What Is a “Risk-Wise” Investor?

Acknowledgements

CHAPTER 1 - The Increasing Importance of “Risk-Wise” Investing

The Holy Grail?

The Game Has Shifted

The New Way to Gain Mastery

Release Your Own Natural, Everyday Risk Management Power

CHAPTER 2 - Introduction to the “Risk-Wise” Risk Management Process

Releasing Your Natural, Everyday Risk Management Skills

Releasing Your Everyday Life-Risk Management Skills in the Investment World

The Fundament Principals of “Risk-Wise”Investing

Building a Solid Foundation

The “Risk-Wise” Investor—Risk Management Process Steps

CHAPTER 3 - The Evolving History of Risk and Risk Management

Historical Highlights

Part 1: The Ancient Past (Pre-600 B.C.)

Early History (600 B.C.-A.D. 500)

The Middle Ages (A.D. 500-A.D. 1500)

Part 2: The Renaissance

Part 3: Entry into the Modern Age and Up to the Present

Observations from the History of Risk and Risk Management

CHAPTER 4 - “Risk”—What Is It, and How Does It Work?

Your Definition of Risk Is Crucial

The Many Meanings of Risk

An Empowering Definition of Risk

Understanding the True Nature of Risk

CHAPTER 5 - Which “School” of Risk Management Is Best?

What Is Risk Management?

The Big Question

Quantitative versus Subjective

Trust the Numbers?

Trust Your Gut?

Two Is Often Better than One

CHAPTER 6 - How Your Body Can Work Against You

Both Beast and Human

Model T Biology in the Internet Age

Understand the Enemy Within

Get to Know Your Second Brain

Applying This Knowledge

CHAPTER 7 - Understanding the Risk Perception/Reality Gap

How We Perceive Risks

Fluctuating Perceptions

Upside-Down Perceptions

Outrage and Risk

Final Thoughts

CHAPTER 8 - Avoiding Common Pitfalls of Decision Making Under Uncertainty

Decision-Making Patterns and Biases

A Lesson about Ourselves

Pattern Finding in Randomness

Luck, Smarts, or Both

Following the Herd

The Greater Fool

Trees Growing to the Sky

Common Hidden Traps

Guarding Against Decision-Making Traps

CHAPTER 9 - The Advantages of Managing Risk Categories

Managing Specific Portfolio Risks

Making the Job Easier

Risks You Can Avoid Completely

Internal Risks You Can Avoid

Risks You Can’t Avoid But Can Manage

Risks You Can’t Avoid and Can’t Control

Risks and Rewards You Knowingly Seek and Can Control

A Closer Look at Crisis Events

Simple Is Better

CHAPTER 10 - Understanding and Prioritizing Risks

The “Risk-Wise” Personal Risk Assessment

Understanding Risks

Prioritizing Risks

Special New Risk Management Priority Category

Instability Is the Norm

CHAPTER 11 - The “Risk-Wise” Risk Management Planning Process

Step 1: Personal Risk Assessment

Step 2: Risk Management Strategies Review and Selection

Step 3: Evaluate Your Risk Reward Trade-offs

Step 4: Make Your Decision to Act or Not Act—Then Implement

Step 5: Ongoing Risk Monitoring and Decision Making

Reviewing the “Risk-Wise” Investor Risk Management Process Steps

CHAPTER 12 - Models of Outstanding Risk Management

Real-World Risk Management Examples

Lessons from Everyday Risk Managers

Commercial Aviation

The Armed Services

Fire and Law Enforcement Services

Common Lessons Learned From Outstanding Risk Managers

CHAPTER 13 - The Value of Knowledgeable and Trusted Financial Advice

Professional Financial Advice

Basic Financial Plan Elements

Financial Advisor Services

Types of Financial Advisors

Professional Designations

Financial Advice Pricing

Finding Your Financial Advisor

Red Flags

Knowledgeable and Trusted Advice

CHAPTER 14 - Navigating Crisis Events and Bear Markets

Crisis Events

The Unique Nature of Financial Crises

What to Do When You’re Uncertain?

Crisis Summary

Bear Market Profile

Turn Lemons into Lemonade

Summary and Afterthoughts

Notes

Bibliography

Additional Information for Readers

About the Author

Index

Additional Praise forThe Risk-Wise Investor

“Risk—you must live with it, you can’t invest without it. Mike’s book does an excellent job explaining risk, and why we as investors (and real, live people!) need to understand this most basic element of our financial lives.”

—E. Blake Moore Jr. CEO, Allianz Global Investors Fund Management

“When investors are terrified, fight or flight—or freeze—are typical reactions, all of which destroy wealth! Mike Carpenter’s The Risk-Wise Investor offers a new and refreshing alternative, one investors (and their advisors!) can learn and profit from.”

—Charlotte B. Beyer Founder & CEO, Institute for Private Investors

“A valuable guide for navigating uncertain times that every investor should read and add to their investment library.”

—Peter Jones Franklin Templeton Investments

“When Michael Carpenter, a savvy, seasoned, and successful investment professional talks about risk, attention must be paid! This book is not a “how to” guide to becoming wealthy, but a rich compendium of tested strategies for protecting and growing your nest egg. Investors saving for retirement, for their children’s education, or for any long term goal will profit from it”

—Burton Greenwald BJ Greenwald Associates

“Financial risk has been a subject that is intimidating and not well understood, yet today has become the financial topic! Individual investors want financial risk to be defined, assessed, and managed. This book allows the investor to accomplish each of these and build a financial roadmap to calibrate their personal risk exposure.”

—Phillip D. Meserve Financial Strategist

Copyright © 2009 by Michael Carpenter. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at http://www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at [phone], outside the United States at [phone] or fax [phone].

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Library of Congress Cataloging-in-Publication Data:

Carpenter, Michael, 1947-

The risk-wise investor: how to better understand and manage risk/Michael Carpenter. p. cm.

Includes bibliographical references and index.

eISBN : 978-0-470-53094-8

1. Investments. 2. Risk management. 3. Investment analysis. I. Title.

HG4521.C2824 2009

332.6-dc22

2009013315

To CindyWonderful wife, mother, and best friendThe smartest, sweetest, most patientand understanding person I know

Preface

When you change the way you look at things, the things you look at change.

Max PlankNobel Laureate in Physics

Welcome and congratulations on your decision to read this book. Many people don’t realize that one of the most common characteristics of truly successful, long-term investors is their appreciation of the importance of investing their time, before they invest their money. Many of those investors learned the hard way the necessity of spending at least as much time understanding the risks of any potential investment, as well as the rewards, before investing their capital. They have found that the more they know about both the potential downside and the upside, the better decisions they make, and the more likely their investment decisions will pay substantial rewards.

User-Friendly Risk Management

Initially, risk management may appear to be a complex, highly technical, and daunting discipline. However, once you become familiar with the “Risk-Wise” approach you’ll see how user-friendly, nontechnical, and effective it can be. The fact that you are now investing your time to gain insights and improve your knowledge level of the enormously important subjects of uncertainty, risk, and risk management is a very positive step. Quite simply, not being aware of or ignoring the critical role risk management plays in successful investing is itself a primary investment risk. So you should congratulate yourself for identifying that overriding risk, acknowledging its importance, and investing your time in gaining a better understanding of risk and risk management. Those few steps alone set you apart from most investors and serve as a key predictor of your future long-term investment success.

The principal objective of this book is to help you become a true “Risk-Wise” Investor. It is focused on helping you to better identify risks, to reduce the likelihood and impact of risks that do occur, and to turn risks into inconveniences and even potential opportunities.

What Is a “Risk-Wise” Investor?

The term “Risk-Wise” Investor refers to any investors with the power of judging their risk/reward decisions correctly, and following the soundest course of action based on broad knowledge, understanding, experience, and preparation . Those simple, nontechnical attributes are the foundation of the entire “Risk-Wise” approach. They are the key to better understanding risk, and the risk management methodologies discussed in this book. They are also the very same factors that helped you learn how to become a master of risk management in dealing with the risks you face in your everyday life. In fact, it’s a fundamental truth of human existence that we are naturally fearful of what we aren’t familiar with or don’t understand. So the more you know and understand about anything, the less fear, better decisions, and fewer missteps you’ll experience, and the more successful you’ll be. That is especially true of risks. In the heat of our fast-paced modern lives, and our fascination and dependency on technology, we may have neglected to apply what has been known about effective risk management for centuries. Almost 150 years ago the great thinker and writer Ralph Waldo Emerson articulated a key foundation concept of effective risk management that is just as valuable today. He observed: “Knowledge is the antidote to fear.” Since fear is integral to our natural risk management system, that insightful observation reinforces the fact that improving our knowledge of risk is key to reducing our fear of risk and to opening the door to better risk management and becoming less anxious, more comfortable and confident investors. When increased knowledge of risk is paired with deeper understanding and thorough preparation, risks are managed much more effectively and our fears and anxieties are dramatically reduced. Simply stated, and with very few exceptions, what we know, understand, and are prepared for cannot harm us.

This important precept is extremely valuable to “Risk-Wise” Investors today. It serves as a guidepost in the continuous search for better ways to identify, understand, manage, and control risks. This strategy is also just as effective in addressing the newly evolving, and sometimes frightening risks emerging from our rapidly changing, faster-paced, more interconnected, and less certain world.

In reading this book you’ll become familiar with the basic practical knowledge, understanding, and preparation methods you’ll need to become a more effective “Risk-Wise” Investor, including:

• Using a new empowering definition of risk to improve your investment success.

• Finding a time-tested way to reduce unpleasant, negative surprises.

• Reducing the severity of negative surprises, should they ever occur.

• Converting risks into “inconveniences,” and even potential opportunities.

• Improving your investment success by understanding your risk biology.

• Seeing where and how to best focus your risk management resources.

• Learning how to know which risks should you avoid, accept, or manage.

• Creating a personalized, systematic process to better identify, manage, and neutralize the risks you face.

• Managing ongoing, ever-changing, and new risks.

• Better navigating extraordinary crisis events, bear markets, frightening volatility, and extremes of the business cycle.

Again, congratulations! Once you finish reading and absorbing the contents of this book, you’ll know and understand more about uncertainty, risk, practical risk management, and how to implement it for your personal benefit than the vast majority of investors. You’ll become a more “Risk-Wise” Investor. That knowledge and those insights will serve you well. They will help you better identify, understand, prepare for, and manage risk. You’ll enjoy the greater peace of mind that comes from truly understanding what you are doing and why you are doing it, plus you’ll avoid many of the potential pitfalls and investment nightmares that can occur along the way. Best of all you’ll improve the likelihood of reaching your personal financial objectives, regardless of the investment environment.

Acknowledgments

The fact that this book was conceived in the first place, let alone completed is due the ongoing encouragement, support, and help of numerous friends, neighbors, and associates all over the country.

Enormous thanks are due to great friends John Riordan, John Nicholson, Rahoul Banerjea, and John Paolucci, whose continuous encouragement, questions, and comments helped me so much when I first became interested in researching and developing a user-friendly, nontechnical approach to understanding and managing risk. A tremendous debt of gratitude is owed to my friends and authors Jim Huguet for his sage counsel and educating me on the many issues facing a potential author, and Beth Birkman for graciously familiarizing me with the book publishing process, and for saving me an enormous amount of time and trouble in researching all that she was happy to share with me over a cup of coffee. Special thanks to wordsmith, author, and now retired risk management professional and consultant, Felix Kloman, for sharing his life-long passion for studying, observing, speaking, and writing about the multidisciplinary and ever-fascinating subjects of risk and risk management. His generosity in providing some key information on the history of risk management made my job much easier. Deep appreciation is also extended to friends and portfolio managers, Tom Goggins and Bill Hamilton, who shared their invaluable perspective as very experienced investment and risk managers. Thanks also to Jack Kenney, for his inspiration, counsel, and fine example of investment professionalism; Janice Reals-Ellig, for her encouragement; Dawn Kahler, for providing the efficient frontier studies; Todd Hiller, for his always thoughtful perspective and comments; and Ed Boudreau, for his suggestions and observations on risk management, from a private pilot’s viewpoint. Special thanks to former submariner Dave Wilson, Fire Chief Ken Willett, and Deputy Police Chief Barry Neil, for their insights into the unique challenges and risk management methods used by professionals whose job is to deal with life-threatening risks on a daily basis.

The deepest gratitude to my parents, Tom and Betty Carpenter, for their encouragement to always follow my dreams, and my brothers, John and Jim, and sisters, Cindy and Kim, for their love and unwavering support. Many thanks are also due to Nannette, Dean, and Ashley Carpenter, and Elizabeth Brodsky, for their technical help and support; senior management consultant, Paula Camara, for her always thought provoking questions and enthusiastic encouragement; and the extremely knowledgeable, helpful, and always friendly staff at the Boston Public Library and the library’s Kirstein Business Branch.

My appreciation is immeasurable for Tom Thomas and Dick Forbes, the two investment industry veterans who many years ago gave me the opportunity to first enter their incredible business, actually train on Wall Street, and build a career as an investment professional. I must also thank all the investors, financial advisors, and former associates, team members, executives, portfolio managers and consulting clients I’ve been unbelievably privileged to work with and continued to learn from over the years. You have made me feel truly blessed.

Last but not least, special thanks to Senior Editor David Pugh, Development Editor Kelly O’Connor, Senior Production Editor Michael Lisk, and Editorial Assistant Adrianna Johnson of John Wiley & Sons for their responsiveness, ideas, editorial assistance, professionalism, and help in making this book a reality.

CHAPTER 1

The Increasing Importance of “Risk-Wise” Investing

May you live in interesting times.

Ancient Chinese Curse

Our world, investment markets, and investing itself have changed dramatically in just the last decade. Investing has been irreversibly altered by a number of powerful, interrelated factors including:

• Enormous growth in the volume, availability, and instant dissemination of investment information.

• Unprecedented expansion of the number and types of investment vehicles.

• A dramatic increase in the sheer number of investors, domestically and worldwide.

• An explosion in the total size of investment holdings.

• Huge increase in investors’ interest in, and knowledge of, investments and investing.

• The ongoing and remarkable lengthening of human life spans, raising the stakes and critical importance of investing successfully.

• The increased global interconnectedness of all investors, economies, markets, countries, and continents, and their growing interdependence on one another.

• The accelerating pace of worldwide change and all the uncertainties it generates.

• Enormously increased market volumes and at times gut-wrenching volatility.

These historic changes have created wonderful new investment opportunities and new challenges. They’ve increased the likelihood and impact of old familiar risks and totally new types of risks when the stakes for what’s at risk are now even bigger. With those dramatic and continuing changes, understanding and managing risk is more important than ever before.