All large investment institutions—including banks, pension funds and insurance companies—devote significant resources to risk management. Most have entire departments—including some of their best people—charged with that responsibility. These organizations are highly motivated to maximize return, but they also understand the need to control risk. Managing risk is just as important for individuals: to produce the highest possible long-term returns, their portfolios must avoid crippling losses.
But unlike institutions, individuals rarely have a deep understanding of risk in all its forms, and they are often ill-equipped to manage it effectively. In this paper we share our reflections about the various forms of risk and the best strategies for dealing with them.