Disruptive Investing

It’s not enough to say you’ve mitigated all your risk in the face of present economic change, but one must be able to quantify, measure and modify it often, in order to stay on the maximum potential return of a chosen portfolio strategy over time periods. Note the emphasis on the plural. The dilemma, to maintain a selection of quality assets on a portfolio's efficient frontier that add incrementally more return while not adding more risk. The problem is that flushing out risk can bring you closer to the market average. Risk-based portfolio optimization schemes, such as Mean-Variance Optimization (MVO) can suffer from unintentional mistakes (decisions made) because MVO tends to weight the historically higher returning assets more heavily, at the expense of ignoring potentially higher returning assets looking forward. In other words, there may be a greater chance that a great performer may no longer perform great, and alternative assets could add a higher return while decreasing the ...

Risk is hard to define and even harder to measure. Because you can’t manage what you can’t measure, you cannot manage risk. You can only attempt to weed it out. Various selection processes and trading tactics can help reduce many types of risk. What is a useful definition of risk as applied to mutual funds? It is the probability of or chance of the loss of capital. It is this probability and its potential causes that create so much trouble. People disagree on what to measure and further can’t agree on how to measure it. Do we use standard deviation, semi-variance, maximum drawdown, value at risk, downside deviation or estimated tail loss? Do any of these truly explain risk or account for it completely? This places investors in jeopardy of loss of capital, because they’re placed into positions of risk they do not understand. Without understanding there's no plausible means of managing money effectively. This means there's always a chance of loss of capital, no matter how well co...