Investment Newsletter February 2018
Risky business
Mike Deverell Investment Manager
Over the years we’ve often referenced the economist Hyman Minsky.
view many investors have taken on much more risk than they realise.
Minsky’s best known theory is essentially that stability, in itself, breeds instability. The longer a market remains stable, the more complacent people become. Investors gain a false sense of confidence and therefore take on more risk and more leverage.
Some popular strategies that have been hit hard recently include “risk targeted” and “risk parity” funds.
Because of this gearing those investors can be hard hit by what starts out as only a slight downturn. They become forced sellers which can create a vicious cycle. A small drop can quickly escalate, causing a very sharp fall in prices. This has become known as a “Minsky moment”. For “stability” you can read also “volatility”. In past newsletters we have remarked just how little volatility we have seen in markets. This has encouraged many people to take on more and more risk. In fact, in our
If you’re unfamiliar, a risk targeted fund automatically invests in assets and particular instruments to target a predetermined volatility rate. For example, an investor might decide they are comfortable with volatility of 5%. In other words, they say they are comfortable with moves in normal market conditions of plus or minus 5% from the long term trend. A risk targeted fund for them would then automatically aim for the highest possible returns at 5% volatility. This is sort of the opposite of what we try to do, which is to aim for a target return at the lowest risk possible. Remember that volatility is only one way of measuring
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