risk

1. 4/23/2015 5 ways to measure investment risk in your portfolio
http://retirehappy.ca/assessing­different­measures­of­risk/ 1/6
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Assessing Different Measures of Risk
Written by Jim Yih • 0 Comments
Last week we
spent some
time talking
about the
differences
between how
the industry
defines risk
and how the
investor
defines risk.
This week, I would like to tackle some of the different ways to
measure and quantify risk.
1. Standard deviation. The investment industry’s primary
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2. 4/23/2015 5 ways to measure investment risk in your portfolio
http://retirehappy.ca/assessing­different­measures­of­risk/ 2/6
measure of risk is standard deviation. Standard deviation
really tells you how much an investment will fluctuate
from the average return. For example, if Bell Charts (by
Morningstar) says that a fund has a standard deviation of
3.0, this means that the monthly return will be 3% lower
than the average monthly return and 3% higher than the
monthly return. If the average monthly return is 2%, then
the range at a 3.0% deviation is ­1% to 5% (statistically,
this happens with a 68% likelihood).
2. Chance of loss. Chance of loss measures how often a
fund loses money versus makes money. Ultra­
conservative investments make money 100% of the time
and never lose. At the other extreme, some Far East
funds lose money as much as 60% of the time and make
money only 40% of the time. The more often a fund loses
money, the greater the patience required by the investor.
3. The magnitude of loss. When an investment loses
money, how much could a fund lose in any given year?
Measuring this will tell us the tolerance we have for loss.
Suppose a fund loses as much as 40% in any given year.
That means a $100,000 investment becomes $60,000.
More conservative funds might only drop 10%, a level
much more tolerable to many, especially nervous,
investors. Bell Charts (by Morningstar) uses a figure
called worst 1­year return to measure the magnitude of
loss.
4. Draw down. According to Levi Folk of Fundlibrary.com,
“A draw down is the loss incurred in a fund from any high
point in the fund’s value until the fund recovers that
value.” Drawdowns are typically expressed as a
percentage from a previous high. For example, the
maximum draw down for the AIC Advantage Fund was
­37% and occurred March of 2003. Fundlibrary.com has
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3. 4/23/2015 5 ways to measure investment risk in your portfolio
http://retirehappy.ca/assessing­different­measures­of­risk/ 3/6
an incredible tool that helps investors understand draw
downs of various mutual funds.
5. Beta ratios. Beta ratios are used to measure the risk of
an investment relative to the risk of a comparable market
benchmark. If we look at the Canadian Equity Funds, the
Mackenzie Ivy Canadian Fund has one of the lowest
Betas at 0.36. On the other end of the spectrum, the
Mavrix Growth fund has the highest beta at 2.00. What
do these numbers mean? If a fund has a beta of 1.0, it is
said to have the same risk as the market. Thus, the
Mavrix Growth Fund with a beta of 2.0 is said to have
twice the risk of the market. The Mackenzie Ivy
Canadian, with a beta of 0.36 is said to have one­third
the risk of the market. Betas are often used in the
industry as a relative benchmark for risk analysis.
In a nutshell
So there you have five good measurements of risk. Which one
is best to use? The answer is it is always better to use more
than one measure to analyze risk. The challenge that any
investor will have is finding this type of information.
The reality of our industry is that finding performance data is
easy. Go to any publication, any website and you will find
annualized returns, calendar returns, and short­term returns.
You can find the best and worst lists for different time periods
and it will be based on performance and returns.
Then go on the hunt for standard deviations, betas, draw
downs and loss information and you will find that you become
more frustrated. Yet understanding risk is one of the most
important aspects to analyze when picking an investment.
Despite the hurdles, the information is out there.
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4. 4/23/2015 5 ways to measure investment risk in your portfolio
http://retirehappy.ca/assessing­different­measures­of­risk/ 4/6
www.fundlibrary.com has comprehensive draw down
information. Standard deviation can be found on any of the
mutual fund websites. Loss information can be found if you
subscribe to Morningstar’s Bell Charts software program.
I’ve always said that it is risk that determines performance.
You need to take the time to understand risk, find ways to
quantify risk and then match the appropriate investments to
your personal risk tolerance. Any investor that takes the time to
go through these steps will be more comfortable with the
investment choices they make.
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5. 4/23/2015 5 ways to measure investment risk in your portfolio
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Related Posts:
Written by Jim Yih
Jim Yih is a Fee Only Advisor, Best Selling
Author, and Financial Speaker on wealth,
retirement and personal finance. Currently, Jim
specializes in putting Financial Education
programs into the workplace.For more
information you can follow him on Twitter
@JimYih or visit his other websites Group
Benefits Online and Advisor Think Box.
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an abused term
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investment portfolio?
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Choosing a Mutual Fund

6. 4/23/2015 5 ways to measure investment risk in your portfolio
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