However, there are risks associated with trying to avoid risk. By being unduly risk-averse, investors often limit the return on their investments and fail to invest their capital so that it will appreciate in value. While these investors feel safe, in reality, battered by inflation and taxes, their capital is eroding and will generate less income in the future, leaving them with diminished resources. There is no investment strategy that totally avoids risk over any significant period of time. It is also important for investors to be realistic about what is a reasonable return to expect without taking undue risks.
Many people become victims of risk by reaching for excessive returns.
Portfolio managers who use leverage or derivatives in a speculative manner to increase portfolio performance are wielding a double-edged sword. The performance of these alternative asset classes may have a low or even negative correlation to the performance of domestic equities. As professional investment managers, our mission is to manage, not avoid, risk. We want to generate attractive investment returns from incurring appropriate risks while avoiding losses from uncontrolled risks. Controlling risk means developing strategies that prevent any one single error from having an irreversible and fatal impact on a portfolio.