The Investment Scientist

Posts Tagged ‘credit risk

I recently met an entrepreneur friend of mine. I was pleasantly surprised to learn that he had sold his business and was now looking forward to retirement. He has about $1mm in his 401k plan. As any shameless financial advisor would do, I asked him if he had someone helping him manage his money.

“As a matter of fact, yes!” he answered. “A friend of mine is also a financial advisor, and he helped me create a balanced portfolio.”

He related that “50% of the money will be in safe investment—a (deferred) annuity that has a guaranteed yield of 5%; the other 50% will be in alternative investments for higher performance.”

To say that I was flabbergasted is a serious understatement. With a friend like that, who needs enemies?

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MZ Capital 60/40 Model

MZ Capital 60/40 model vs S&P 500

Once I asked a prospective client how he managed investment risk.

“Well,” he intoned, “I try to get in before the market rallies and get out before it tanks.”

It is not just lay investors who have this misconception about risk management; many financial advisors equate risk management to market timing as well. One only needs to watch those advisors talking on CNBC to see that many of them are in the fortune-telling business.

So how do I manage risks? There are three steps.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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