Jeff Miller

About the Author Jeff Miller

Jeff is the President of NewArc Investments Inc., manager of both individual and institutional investments. Jeff is a registered investment advisor, and portfolio manager for NewArc's investment programs. Jeff is a former college professor with a hands-on, real world attitude. His quantitative modeling helped inform state and local officials in Wisconsin for more than a decade. A Public Policy analyst, he taught advanced research methods at the University of Wisconsin, and analyzed many issues related to state tax policy. Jeff began in the financial business as Research Director for trading firm at the Chicago Board Options Exchange. He investigated anomalies in the standard option pricing models, taught classes for beginning options traders, and developed new forecasting techniques. In 1991 he established a general research consultancy, working with professional traders at all of the Chicago financial exchanges. In 1998 he started NewArc Investments, Inc. Jeff has a commitment to the specific needs of individual investors. NewArc offers five different programs. It is not a one-size-fits all approach, but one that emphasizes the unique circumstances of each client. Jeff also serves on the board of two small technology companies (currently Chairman at one). He is occasionally as an expert witness in legal cases involving financial markets and hedging.

How to Think about Risk

As the bull market marches on, everyone is itching to call the top.

  • Some see an economic collapse as the Fed changes course;
  • Average investors worry about markets “up here” with strong memories of prior declines;
  • Pundits proclaim that it is time to “take something off the table”;
  • Those who have been wrong get highlights, insisting on kicking the target down the road, i.e. half cycle? Ten year returns?
  • The market risk/reward calculation is skewed.

This is a complex but important topic. I have written about each aspect in the past, but it is timely and important to pull these threads together. I plan a series of posts (suggestions welcome):

  1. Why risk is an individual question, and why the analysis must include both upside and downside.
  2. Downside risks.
  3. Upside risks.
  4. Hedging strategies: Cheap protection?
  5. Pulling it all together: A plan for action.

This post covers the first topic, but there is more to come.

Risk is an Individual Matter

No one should tell you how much investment risk to assume. Not Warren Buffett. Not CNBC. Not Jim Cramer. And certainly not my blog posts.

Each person has a different investment goal and a different risk tolerance. Everyone would like to have a guaranteed return with almost no risk. Beware of those claims, the basis for the BM approach (think of a famous failed manager and manage a chuckle).

Any investment program starts with an analysis of your goals. Do you have what you need, and are therefore preserving wealth? Or like most of us, do you need to add to wealth to meet your goals? If you are in the latter group, how much risk is required to aim for the needed return?

There are no shortcuts or easy answers. Most of the “coupon solutions” have become a crowded trade. If you have reached for yield – apparently safe – you have assumed risk whether you know it or not. If you have too much invested in stocks, you will be frightened at the first downturn, even if it is a normal fluctuation.

It is fine for Mr. Buffett to say that he would not own bonds and prefer stocks. Most investors need some kind of balance. It is an individual matter. Beware of anyone giving universal advice of the “all in,” “all out” or 50% invested (!!) style. How could these same answers be right for everyone?

Here is a quotation from a piece that I share with investors, but have not published:

Investors have a dilemma — If stocks resume the long-term trend of 8 -10% annual growth, they want to participate. In fact, many of them must participate if they are to meet retirement goals. It is important to realize that this long-term outcome is the most likely.

If the Dow goes to 20K, we would all like to be on board, but what about the risk of another meltdown?

The challenge is how to provide the needed investor confidence in a world where most of the news and commentary is very negative. Many intelligent investors want to participate as they watch the rebound in corporate profits and stock prices. They are willing to assume reasonable, normal risks, but wonder about another economic collapse.

The Dow 20K reference started with the Dow at 10K and many predicting a 50% decline. Here is the history.

To emphasize, I have not been suggesting an “all in” approach. Asset allocation is an individual matter.

Risk Analysis is Balanced

If you think about risk in terms of a stock sell-off, you are an amateur – a deer in the headlights.

Everyone is living longer. Inflation at the rate of 3% cuts your nest egg in half in 24 years. Sitting completely in cash is a decision, and it could be a costly one.

If you want to make a balanced decision about your investments, you need to consider the following:

  • Downside risk
  • Upside risk
  • And most importantly, your own needs.

Taking this approach is stronger than any magical solutions and certainly better than getting scared witless (euphemism TM OldProf).


I have a varied client base – assets, income, age, and objectives. The key message of this post is that there is no universal answer. You should strongly resist anyone who suggests otherwise.

If you right-size your risk, you will be able to hold strong through the normal market fluctuations.

As always, I welcome suggestions on this new series!


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