By: musicwhiz An interesting thought which came up the other day as I was travelling in the bus was one of exploring and understanding the concept of risk appetite, and what it actually meant for investors. One should understand that the concept of "risk" as we know it (and which is defined by fund managers and academics) is that of the volatility of an investment or asset class. Thus, the premise which is built upon this foundational concept will necessarily revolve around minimizing volatility within one's portfolio in order to "minimize risk". As I will be discussing in the paragraphs below, this is a flawed concept which may result in substantial losses for the average retail investor. I think most readers would have experienced some form of "risk appetite assessment" at some point in their lives; whether it is during the financial evaluation being performed by a financial planner or perhaps an independent financial assessment being conducted by a fund manager to ascertain one's risk tolerance. In such cases, the term "propensity for risk" comes into play; and this essentially attempts to quantify and measure a person's tolerance for risk and for risky activities (a score or weight is attached to each response in a typical questionnaire). Read more...