Guide to Investment Strategy: How to Understand Markets, Risk, Rewards, and Behavior by Peter Stanyer

PART 1
The big picture

1 Setting the scene: What is risk for a
personal investor?

Think about risk before it hits you
Risk is about bad outcomes, and a bad outcome that might arrive at a bad
time is especially damaging and requires particularly attractive rewards to
compensate for facing that risk. Investors and their advisers have typically
judged the riskiness of an investment by its volatility, but in the words of
Antti Ilmanen, author of Expected Returns: An Investor’s Guide to
Harvesting Market Rewards, not all volatilities are equal, and the timing of
bad outcomes matters for risk as much as the scale of those bad outcomes.
A theme throughout this book is that investors should think about how
investments might perform in bad times as the key to understanding how
much risk they are taking. There is little discussion of what constitutes a
bad time, which will vary from investor to investor, but it is best captured
by Ilmanen, who defines it as a time when an extra dollar of ready cash
feels especially valuable.
What constitutes a bad outcome is far from simple. It is typically
specific to each investor. Thus, a bad outcome can vary from one investor to
another and from investment to investment. If an investor is saving for a
pension, or to pay off a mortgage, or to fund a child’s education, the bad

Guide to Investment Strategy: How to Understand Markets, Risk, Rewards, and Behavior by Peter Stanyer