Thursday, June 11, 2009

The "Other Risk"

Each of you has decided how much "bounce" you are willing to bear to achieve higher returns. This is an individual decision about principal risk (the risk of volatility in the market) versus potential reward. The other risk we touch on in meetings is purchasing power risk: Will my rate of return keep pace with increasing costs each year (inflation)? Purchasing power risk is often the forgotten cousin of principal risk.

When market volatility scares an investor out of the stock market, principal risk may decrease, but purchasing power risk may increase. Investors need to account for both of these risks when making investment decisions. This brief presentation addresses this issue, using real returns - defined as the amount by which returns exceed inflation.

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