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Do We Really Understand What "Low-Risk" Means?

Posted March 9, 2012

Topics: Finance & Investing

Do we really understand investment risk and what it means? I have been trading for 35 years but I find myself re-thinking this question in profound ways.

I have recently been introduced to some new ways of thinking about investment risk. This has completely changed my point of view about trading, especially conservative trading. But "conservative can mean different things to different people; so I offer a definition of this concept. Any low-risk investment with above-market average return is a Conservative Investment.

In the past I always thought of risk in terms of specific products, especially when it came to options. For example, a covered call is conservative but an uncovered call is high-risk. A debit spread is conservative but a credit spread is high-risk.

Now I am re-thinking the entire matter. Even after being a trader and investor for more than 35 years, I have changed my entire way of thinking. Now I realize that risk is not based on the attributes of the strategy, but on timing and placement. So for options, for example, it is not enough to stick with a specific strategy. You really need to look at a broad range of attributes including volatility, probability, and even fundamental and technical analysis.

In the coming months I am going to have a lot to say about this, and I want to create a dialogue with other traders, risk managers, and anyone else concerned with market risk. The purpose is to organize a single method for flexibly looking at all of the attributes of stocks and options in order to develop a conservative policy, and not one only limited to perceptions of conservative strategies.

Does this idea appeal to you? It makes so much sense to me that I want to start the dialogue with as many interested traders as possible. If you want to talk about this and take part in these ideas as they are developed, please write to me at thomsett@conservativetrade.com and let's start talking about it.