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Can we rethink "risk" for a moment?

#1
    In answering another question, I pulled up some charts of 10 year performance of several different categories of funds, from money market to aggressive growth technology funds. It's got me rethinking some conventional wisdom. While it's common sense that the money market would suffer the least from a major event like the great recession, but how would these funds (TRBCX, PREIX, PRGTX, SPAXX, VSCGX) compare after a few months, at the end of 2009? By that point the growth funds had recovered the quickest, with PRGTX leading the way at $11,565. The S&P fund PREIX was the laggard at that point, at $9,039. At the end of 10 years, PRGTX was far ahead of the others, at $58,491, with the money market at the bottom with only $10,246. Consequently this data suggests that for periods of 10 months or longer, growth funds may have lower risk than even conservative or money market funds based on 10 year data including the great recession and the correction of 2018. This is contrary to the usual measures of risk including the Morningstar risk meters in the image below. Thoughts, opinions?
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#2
Try starting your graph at 2000. You will get a very different picture.
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#3
Sure, but that's a rather artificially selected worst-case scenario assuming an all-at-once purchase at one of the worst possible times within the past 89 years.
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#4
If only I could plan my retirement strategy based solely on averages. 
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#5
What else can we use? Short of crystal balls and time machines, every other approach has its weaknesses.
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#6
Risk is not conventionally measured by returns but by deviations from those returns. And, yes, deviations from returns go down with time.
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#7
RE the "Morningstar risk meter", I suppose you are referring to the "Morningstar Category Risk" column. I think it has a slightly different interpretation. First, the "risk meter" is the relative risk of the specific fund within the specific fund-category, rather than across different fund categories. I.e., a low value suggests that the fund is less risky as compared to other funds in the same category. Second, the risk is measured based on the variation in the monthly return of the fund. A low-risk simply means that the return is more predictable (less volatile) - it doesn't necessarily mean that the return is great.

I was looking for authoritative sources for the Morningstar terms, but couldn't find anything other than the following: http://www.morningstar.com/InvGlossary/m..._risk.aspx
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#8
(11-21-2018, 03:25 PM)RichMoose Wrote: RE the "Morningstar risk meter", I suppose you are referring to the "Morningstar Category Risk" column. I think it has a slightly different interpretation. First, the "risk meter" is the relative risk of the specific fund within the specific fund-category, rather than across different fund categories. I.e., a low value suggests that the fund is less risky as compared to other funds in the same category. Second, the risk is measured based on the variation in the monthly return of the fund. A low-risk simply means that the return is more predictable (less volatile) - it doesn't necessarily mean that the return is great.

I was looking for authoritative sources for the Morningstar terms, but couldn't find anything other than the following: http://www.morningstar.com/InvGlossary/m..._risk.aspx

I'm thinking what would be useful as an investor is a different kind of metric that instead of equating risk with volatility or some such thing, instead characterizes risk as the probability of having more money than you started with at a certain point in time, but I guess that's the holy grail, isn't it. There's also something about the time element, that risk shouldn't ever be a fixed number but rather a curve over time, which Warren Buffett includes in his recommendations of index funds for instance. He'd seemingly never recommend an index fund for earning money within the next month, only for over long periods of time. So over-time-probability-curve-of-coming-out-ahead is, I think my most desired metric.
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#9
And the probability over time is characterized by a central tendency and a a spread around it (higher moments being less important.) Which brings us back to looking at average returns and deviations from those average returns. The latter are called "risk" in the investment industry but they could as likely be called "opportunity".
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#10
I think for comparison/benchmarking purpose, "performance" volatility and "market return" are useful and hence they are commonly used in the industry interchangeably with risk. But as you suggest, definition of "risk" can be different for different situations/people. I think the "probability of having less (inflation-adjusted) money over a specific time-horizon" can be a great definition of risk for many people, especially those who care more about principal preservation. I like how "risk" is defined in the "Level III Investing" book - the probably of not being able to use the investment at the time of need. The essence is that, investors with long time-horizon need not worry about volatility in the interim period (because they aren't going to cash-out). However, people who like to get in and out of investments may find volatility as an attractive aspect of an investment. 
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