Managing Risk, Trading Risk, and Understanding Risk are very different!

I had a visitor last week – obviously an adviser who wanted to tell me how to MANAGE RISK. I was stunned, so I allowed him.

Let me tell yoa u in short:

a. he wanted me to trade more often

b. he wanted me to buy PUT OPTIONS on many of my perma bull positions

c. he wanted me to reduce my exposure to equity.

This is a terrible suggestion. It actually means

a) I fail VERY fast AND OFTEN

b) I fail fast and often

c) I fail slow in the long run

Actually instead of managing my risk, he was asking me to take more risk, and ruin my portfolio. Let me explain. When you trade more often there is always a HUGE risk of triggering the bottom (long) or upper (short) stop loss. That will mean additional losses. It also means I pay more brokerage, and I pay more for ‘risk management’.

When you buy PUT OPTIONS on shares which you have held for say 30 years, it is ACTUALLY increasing your portfolio holding costs! You are paying RISK PREMIUM ON the hold to death portfolio. This is Amazing portfolio destruction.

The worst advice was of course to reduce my equity portfolio. No, I am asset class agnostic, and I may only suffer a lower return, but survival is not so tough for me. However the so called ‘Reducing risk in the long run’ is an amazingly stupid strategy.

Clearly the RM did not understand risk at all.

He did not even know the difference between ‘managing risk’ and ‘taking risk’

I guess that RM should not be allowed to talk about risk. At least to people who make a living explaining risk to bankers and insurance people.