Excerpt from Barron’s quoting DataTrek co-founder Nick Colas:
…. “DataTrek’s Nicholas Colas thinks about a different kind of risk—the one that is completely unplanned for. In a recent note, he relays the story of his parents, who were forced to leave Cuba in the 1960s. They left with $200 and some keepsakes, thinking they’d be able to return in a matter of weeks. They were wrong. What does that have to do with the stock market? For starters, it demonstrates that “effective risk management goes far beyond traditional financial measures like Value-at-Risk,” and involves thinking about what could go wrong, particularly the things that are hard to plan for. For Colas, that means always having a hedge in place, and that hedge is a 10% to 15% percent position in Treasuries maturing in 10 years or more. That can be a drag on performance during good times (no hedge is free), but it can pay off in the worst-case scenario.
Bad risk management is a failure of imagination,” Colas says. “Good risk management is efficiently preparing for events that will probably never occur”….
Read the full article here on Barron’s!