RiskMetrics - Importance of Considering Risk


Importance of considering risk

Understand why you need to consider risk before making investment decisions

Considering risk should be an integral component of your decision making process

We pay a great deal of attention to risk in our personal life, but often make financial decisions without an appropriate understanding of risk. We look both ways before we cross the road. We research a company's prospects before we accept a job offer. We buy health, auto, life and homeowner's insurance. We need to apply the same risk management discipline when making financial decisions.

Making investment decisions without measuring the risks is the same as courting disaster. Think for a minute how absurd it would be to live your personal life without considering risk:

Need to quantify risk as you currently quantify return

As investors become more conscious of risk, they generally become more discerning in selecting suitable investments. Before investing, knowledgeable investors review formal risk disclosures in order to make more informed investment decisions. Some progressive money managers have already started to publish detailed disclosures about the risks they take.

In addition to better risk disclosures, investors should receive more quantitative risk information. While mutual funds provide precise return numbers, most risk disclosures are still vague at best. For example, most mutual funds convey their proclivity for assuming risk with only generic labels like, "aggressive," "balanced," or "moderate". Risk should be quantified as rigorously as returns. How would you feel if your mutual fund statements reported that your last quarter's returns as "conservative" or "moderate", instead of stating the actual return number?

Risk information is as important as return data, and should be updated and accessible on a daily basis (similar to Net Asset Value (NAV) calculation). The mission of RiskMetrics is to provide investors with updated daily risk measurement information for all traded financial assets.

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