Thursday, October 15, 2009

Shifty Data For Investment Planning - Patchy Statistics Deceive Investors

Investors are exposed to two forms of risk in the financial markets. One type of threat is discussed openly by the financial community and the business press, while the other is seldom acknowledged in spite of its whopping importance.

In the financial community, the term "risk" usually refers to the volatility of the price of an asset. We may refer this type of bugbear as chronic risk.

In addition to the fluctuation in price, however, there is a menace lurking in the background which the financial community rarely talks about in spite of its importance. All too often, an asset or even an entire fund breaks down and goes kaput. In that case, the investors in the vehicle end up losing their shirts in one fell swoop.

Since the notion of total ruin is a pariah in financial circles, hardly anyone likes to talk about it. In line with this state of affairs, there is no terminology that is in general use for this type of bogey.

Given its significance to the investor, however, the subject ought to be brought into the open and given its due. In the absence of a suitable term, we will refer to the prospect of death as terminal risk.

This type of threat is almost always ignored by the statistics of the forum. The omission is especially baleful in the case of a compilation such as the average performance of the "Top 100 Firms" in a particular area.

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