Investment Risk for Long-Term Investors
25 Pages Posted: 7 Apr 2021 Last revised: 14 May 2021
Date Written: May 14, 2021
Investment risk is addressed from the perspective of long-term investors, with key concepts being discussed and methods outlined for evaluating risk over long horizons. The main themes include: the need to focus on shortfall versus objectives and sources of sustained loss, rather than return volatility; the potential influence of path dependence; and the benefit of directly modelling the wealth accumulation process. A framework is presented that decomposes the drivers of wealth accumulation into initial expected returns, discount rate risk, cash flow risk and reinvestment risk. Approaches are highlighted for forming distributions of accumulated wealth, while demonstrating the importance of incorporating prevailing market conditions into any risk analysis. Alternatives to the Standard Risk Measure used for Australian superannuation funds are discussed.
Keywords: investment risk, investment horizon, long-term investing
JEL Classification: D81, G11, G17, G20, G51
Suggested Citation: Suggested Citation