Also there is no need to take risk. There is risk capacity (ability to take on risk) and there is risk tolerance (willingness to take risk) but there is no need to take risk.
The primary references we used are investment textbooks, which are based on the academic literature. The intention was to avoid personal viewpoints, and simply present it the way it's presented in the references.
bobcat2 wrote:This stuff about risk as a need is straight from Larry Swedroe who is not an academic.
Yes, you caught me on that one. I would prefer to use a simple phrase (preferably two words) that captures "how an investor determines how much risk to take" or "how much risk is appropriate for the investor", regardless of what framework is used to evaluate this. I personally use "risk tolerance", but realize this is open to challenge because to some it relates only to the willingness part (e.g., as you say above).
Do you have a suggestion for a simple phrase to use instead?
Would folks object if we just used "risk tolerance", since beginners are unlikely to be aware of the multiple dimensions of assessing how much risk to take?
The intention in the advanced
article is to cover various frameworks for evaluating risk, which would perhaps include a textbook approach (like the CFA standard), the approach outlined in the Boglehead's investing book, and frameworks presented in some other books by "Boglehead authors" (including John Bogle himself, and yes, Larry too). For this article it's too much to delve into.
Regarding references, my proposal has been to basically
follow Wikipedia policy on credible sources, with the following priority: textbooks, published papers, etc., then Boglehead authors, perhaps giving higher priority to John Bogle and the authors of the Bogleheads Investing and Retirement books (since this is Bogleheads after all), next to other Boglehead authors (W. Bernstein, Swedroe, Ferri, etc.), but also not ignore authors like Swenson, Ilmanen, etc.. Lowest priority would be to online references, since these are not considered credible by Wikipedia; however, they are extremely useful since they are easier for readers to access. The textbooks and papers do not capture everything Boglehead (although they do much of it), so referencing Boglehead books seems appropriate. My hope is to increase rigor in referencing, but most of us are not scholars (I'm certainly not), so it won't be perfect.
On a personal note, I find Larry's framework on risk to be the most useful, which is why I "sneaked it in". When I first read about it some years ago, the "need" part was a huge "aha!" moment for me. It motivated me to help my Dad significantly reduce his equity exposure shortly before the financial crisis, and saved him from the anguish of going through that shortly before he died. It helped me realize that I have little need to take risk, and to structure a portfolio which resulted in reduced anxiety during 2008/2009. I mostly view it more from the perspective of lack
of need to take risk, and stress it more for people who have already "won the game" or are close to winning it. I think it's very difficult if not impossible to be highly analytical about determining need to take risk and, as Larry seems to propose.
Also, although Larry does express a point of view, he does seem to keep up on the academic literature, and interpret it for those of us who don't have the chops to understand the papers ourselves. I always keep in mind though that he does tend to take a certain side in the debates, as is evident in the many interesting debates we see in the forum.
On a more positive note your definition of investment risk is spot-on IMO.
Well at least we got one thing right.
You did see my first reply to your first reply where I said I agreed with everything
you said, right?