• Skip to primary navigation
  • Skip to main content
  • Skip to footer
Mullooly-Logo

Mullooly Asset Management

Fiduciary Fee-Only Financial Planner | Investment Advisor in Wall, NJ

  • Our Fees
  • About us
  • Schedule a Meeting
Risk Management vs. Return Management

Risk Management vs. Return Management

June 28, 2018 by Brendan Mullooly, CFP®

Risk management is a topic we hear a lot about when it comes to investing. Its popularity tends to ebb and flow based on recent market performance. This seems intuitive to me because when the risk we’re trying to manage doesn’t occur, risk management often looks like a sunk cost. Conversely, when a risk we were neglecting occurs, we love playing Monday morning quarterback. If this sounds wrong, trust me, it isn’t. This is natural human behavior described aptly by Morgan Housel: “You will likely be more fearful when your investments are crashing and more greedy when they’re surging than you anticipate. And most of us won’t believe it until it happens.”

In the real world, there isn’t a risk management alarm that goes off before market events to let us know what to do. For most investors, this means practicing forms of risk management regardless of the market environment. As Ben Carlson once wrote, “Risk management isn’t something you can just turn on and off when you feel like it. Risk is ever present in the markets.”

Risk management is not about achieving the highest possible rate of return. It’s about making sure you’re capable of collecting the returns you need to achieve your goals. Staying in the game is more important than finishing first. With that being said, I think a lot of things get done in the name of “risk management” that don’t actually deserve the title. There’s a fine line between managing risk and destroying your ability to earn returns.

Risk management done poorly ends up looking more like return management. Here are a few examples:

Risk management: Owning a diversified stock mutual fund or ETF to manage single company risk
Return management: Owning 30 different mutual funds and ETFs with overlapping exposures to “diversify”

Risk management: Systematically using a trend following approach in your portfolio
Return management: Selling out of the market every time it dips 5%

Risk management: Regularly dollar cost averaging into your investment portfolio to minimize regret and timing risk
Return management: Stockpiling cash while relying upon intuition to identify the best time to buy

Risk management: Determining a sensible asset allocation based on goals, time horizon, and an overall financial plan
Return management: Tinkering with your asset allocation in response to market headlines

Risk management: Periodically rebalancing your portfolio back to its target asset allocation when it drifts too far
Return management: Placing daily trades in an attempt to outsmart the market and other investors

Risk management: Diversifying your exposure to different investment strategies because they will all spend time performing well/poorly over time
Return management: Strategy hopping in an effort to always be all-in on “what’s working”

Risk management: Realizing that the simplest way to hedge an unpalatable investment risk is to not take it in the first place
Return management: Falling victim to the siren song of risk-free returns in its various formats

Nobody can tell us in advance when we’ll need to manage risk or even what risks will need managing. The important thing for us to realize as investors is that this is okay. We cannot possibly hedge out all of the risks involved with investing. There are no returns without risk. Risk management isn’t about maximizing returns; it’s about not destroying them, while living to see another day.

Never miss a post...and we deliver!

newsletter mailman

Get our updates delivered right to your inbox. Sign up today!

Success! Now go and check your email to confirm your subscription.

There was an error submitting your subscription. Please try again.

We won't send you spam. Unsubscribe at any time. Powered by ConvertKit

Filed Under: Asset Management, Investor Behavior Tagged With: asset allocation, behavioral finance, long term investing, risk management

About Brendan Mullooly, CFP®

Brendan Mullooly is a CERTIFIED FINANCIAL PLANNER™professional with Mullooly Asset Management, Inc.

Footer

Mullooly-Logo

2052 NJ-35, Suite #203
Wall Township, NJ 07719
Phone: (732) 223-9000
Fax: (732) 223-9600
Email: support@mullooly.net

Form CRS

  • Privacy Policy
  • Disclosures and Legal Disclaimers

Useful Links

  • Contact Us
  • Client Login
  • Pay Bill Online
  • About us
  • Our Fees

The information on this website and blog do not involve the rendering of personalized investment advice. A professional advisor should be consulted before implementing any of the options presented. None of the content contained in this website should be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.

Follow Us

  • Facebook
  • LinkedIn
  • Twitter
  • YouTube

Resource Center

  • Videos
  • Podcasts
  • Blog

Copyright © 2021