I often stress the importance of risk adjusted returns here at TPC. In this business it’s often too easy to confuse brilliance with luck. We saw this last year as the overwhelming majority of investment managers lost money and underperformed their corresponding indices. It turned out that investment managers and risk managers are not one and the same. The fact that ONE mutual fund out of thousands was positive in 2008 is truly ridiculous.
A big part of risk management is money management. Knowing how much to spend or allocate on any particular investment and understanding the risk parameters behind that investment are vital to achieving high risk adjusted returns. Only a fool walks into a casino and bets it all on black. Rather, the smart casino player (if there us such a thing) plays a game where he can be patient and wait for those rare times when the odds are in his favor where he can allocate capital according to the reduced risk parameters. I’ve attached a fantastic paper on the topic which I am sure you will find helpful.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.