There is nothing investors wish for more fervently than an investment with high potential gains and negligible risk. Ideally, a secure cage where they can simply lock the risk away — the way the good fairy locks up the monster in the fairy tale. They would give a great deal if only the unpleasant risk aspect of their investment could be avoided. And where there is a wish, there is often a fairy too, promising something wonderful.
This is precisely where financial service providers find their psychological hook when they go fishing for clients with risk management models. They claim it is possible to identify risks early on through sophisticated scientific models and to act accordingly. The suggestion is that you can get out before a sharp market slump and get back in early — before the recovery begins. In this way, so the story goes, you can capture the gains of the equity markets while switching off the corresponding risks. That this involves considerable technical and staffing costs, which naturally have to be paid for, goes without saying. That, more or less, is the subtle message — often conveyed only between the lines — behind a great many heavily marketed risk models.
„Risk management is nothing more than clever marketing!“
Share
It is not possible to identify risks early on through cleverly refined scientific models and to act accordingly. — That is a fairy tale told by some financial service providers.
Share
All of these models failed dramatically
But the sad truth is: these are fairy tales. No system in this world can actually deliver on this. These claims are merely clever marketing. And this marketing is incredibly successful, because it promises exactly what every client wants to hear: that returns can be earned on the equity markets without any meaningful risk.
Clear scientific research, however, shows beyond any doubt that the major turning points on the international financial markets — and these are what matter, not the short-term ups and downs — cannot be predicted. Not even with the most sophisticated risk models. To see this, a brief look at the financial crisis of 2007/08 and the corresponding market collapse is enough. It was not only private investors who had to accept heavy losses. Large institutions in particular were hit — institutions that had the most varied (and most expensive) risk models at their disposal. All of these models failed dramatically. Indeed, quite a few analysts even consider these risk models to have been one of the causes of that last great financial crisis. And now private investors are supposed to be blessed with these very models.
Just to avoid any misunderstanding: my thesis is not that risk management is useless. Quite the opposite: within an overall investment concept, it has indispensable tasks to fulfil. But: it cannot deliver what many investors wish for, and what the financial industry therefore subtly suggests to them — namely, to protect them from the major turning points on the international financial markets without any loss of returns.
Would you like to learn more? Send us an email at info@quirion.de and we will send you a detailed account of what risk management can actually do.
