By Michael T. Carpenter
Reviewed by Jon Ford, CFP®
Jon Ford, CFP®, owns CF Financial Planning Solutions, Inc. in Mesa, Arizona. He writes a regular "Financial Fundamentals" column for the Cedar Falls Times in Iowa.
The Risk-Wise Investor will ease the amorphous dread financial planners experience in the crazy world of portfolio management. Taking control of investment risk's uncertainty for our clients is what The Risk Wise Investor is all about.
The book is very well organized, instructive, interactive and hard to put down when you notice the nuggets you're about to mine. My suggestion is to read the book the way you've been taught: first, the Table of Contents, followed by the first and last chapters, then finally returning to Chapters 2 through 14. The author's organization, clarity, and spiraling of ideas make the classic reading approach to a fact-packed guidebook like this much more comprehensible.
Carpenter says that understanding investment risk begins with an accurate definition of risk. If you think investment risk is market volatility, variations in investment return, loss of capital and/or below benchmark performance, you've got it all wrong. Instead, says the author, these are secondary or even tertiary results of investment risk. Planning for those misses the mark.
He uses the definition of risk offered by Peter Oppenheimer, Apple's CFO: "The degree to which an outcome varies from expectation." The rest of the book illustrates how to do this and the expected results: empowerment because of new-found flexibility and realism, and because the possibilities are now under our control; we can now think through a whole range of possibilities, and we can choose to ignore, accept, or prepare for what we expect. Carpenter extends his thought to teach the reader how to prepare for high-risk but highly improbable events (black swans) that have recently laid waste to so many of our clients' portfolios.
The book does all this by skillfully taking us through a risk management process that begins by examining a thousand year history of risk management techniques and defining risk to include the most recent schools of thought about risk management. He talks about how our emotions work against us, the differences between reality and our perceptions, and the resulting pitfalls of decision-making under the ambiguity of uncertainty.
The key to taking control, he says, is to identify and manage risk categories by prioritizing and planning for risk. He skillfully provides examples of how this has been accomplished among firefighters, law enforcement professionals, and commercial aviation risk management experts.
Plan to spend some time with this book, and perhaps use the book with your study group; it will be an eye-opener to you and your clients. If standard deviation, loss of capital, and economic, political and financial surprises and the like are not investment risks, then what are? Read the book-you'll have no regrets and you'll be much better prepared to take your clients through the next market breakdown.
John Wiley & Sons, Inc. (2009)