FT Guide to Saving and Investing for Retirement

Chapter 22

Managing Risks

Controlling risks along the journey

‘There are old pilots, and there are bold pilots, but there are no old, bold pilots.’

E. Hamilton Lee

The core of investing is bearing and managing risks. You need risk to generate returns. But you need to control it to limit losses. In particular, you must mitigate the risk of ruin – losing so much that recovering the losses is unlikely, for example, because of insufficient time.

Managing risks involves two separate activities: risk measurement and risk management. Risk measurement quantifies risks. Risk management is deciding which risks to take, which risks to mitigate and how to do so.

In this chapter we review some risk measurement and management techniques. We keep it simple, ...