“I, however, place economy among the first and most important republican virtues, and public debt as the greatest of the dangers to be feared.”
- Thomas Jefferson.
There are, crudely, three types of investment risk once one leaves the supposedly safe shores of cash deposits (and they, of course, come with their own very specific risk in the midst of a systemic banking crisis). One risk is that our investment incurs mark-to-market volatility, which may be pronounced. But market risk is a fact of investment life, and we just have to deal with it. One is inflation risk, the risk that our investment – however it performs in nominal terms – sees its real value eroded by inflation or currency depreciation. The third is that we incur a catastrophic loss of capital. As investors we can try and protect against risks 1 and 2, but we should really try to protect against risk 3, because encountering a sufficient number of risk 3 outcomes means ‘Game Over’ for our portfolio and for our capital. Welcome to the Euro zone debt and currency crisis, which manages to involve all of them.
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