Rice Money Managers, Inc.

Your Past Results: How Have You Been Doing?

The discussion below focuses on evaluation of your investment and stock market risk.  It is not geared to the more frequently asked and very important question of what your personal risk level should be.  In general, your personal target risk level should be at the lower of that justified by (a) your financial situation and (b) your investment temperament.

Compared to What?

Most people do not have a good handle on how they are doing in the stock market because they do not ask, "Compared to What?"   At the simplest level, in a bull market most stocks go up and in a bear market most stocks go down.  Seeing an account rise in value during a bull market and falling in a bear market is essentially meaningless in determining how you are doing in the stock market.

Risk

Investment risk is a subtle concept, although the word is a basic Anglo-Saxon one.  Against the Gods: The Remarkable Story of Risk, is a well written, non-mathematical discussion within the grasp of most investors.

Most investors think of risk as the chance of losing their money.  Most academics think of risk as fluctuation in value, either absolutely or compared to market.  Returns are, to some extent, connected to risk.  One cannot reasonably talk about your return without also considering your risk.  In other words, returns need to be adjusted for risk to make reasonable assessments of how accounts are doing.

Your accounts may be doing better or worse than you suppose when risk is taken into account.

Copyright © 2002 Rice Money Managers, Inc.