Accepting Risk

Finance a la shmoop what is event risk risk risk risque er yeah,

how'd that get in here all right moving on investing carries all kinds of risk

inflation risk is a biggie for those who like to buy safe government low-interest [100 dollar bill inflates]

low risk paper yes their investments always pay back but while they only get

like 2% kind of returns and in a world of 3% inflation well that's a big

problem well then there's market risk too [S&P 500 graph appears]

stock markets go up and down all the time so yes over time they go up but

well you might own stock in a great company that in a bad market gets taken

down like all the other boats in the ocean when a big quake hits and suddenly

it's a tsunami time and well everything drops but historically if you hold good [People in discussion at a meeting]

companies long enough well well their high quality bails you out of any

short-term losses you've suffered so if these are normal risks that happen all

the time they're things that just go on and on it's all part of the investing

world then what's an event risk which implies that something happened there

was a vent there was a finite period of time a finite situation that made bad

things happen with the overhang that events you know like a solar eclipse or [Solar eclipse appears]

or the election of a smart ethical congressman well those don't happen all

the time that's an event right it's a one-time thing well here's an event a

meteor hits the earth and all of a sudden while the most prized possessions [Meteor strikes earth]

are simple things like water and gas and land with wood and animals yeah that's

an event well the value of your Amazon and Netflix stock in that case well

those companies are probably not worth whole lot cuz internet is probably

dead or at least injured so when wizened old investors invest they typically [Old investors appear holding stock]

think about "once in a lifetime" events with event risk as being

a risk that they have to account for and yes thinking about that meteor hitting

the earth in fact is one of the things that professional portfolio manager

thinks about when building their fund and if you want to do something a little

more realistic than a meteor what about some crazy dictator and [Rocket appears in the sky]

Korea nuking us yeah not like one in a gazillion chance probably well more

recent event was the near-death experience of the US financial system in

the 2008/09 mortgage crisis where trust in banks and the banking system

almost led to the bankruptcy of Goldman Sachs Bank of America JP Morgan and a

bunch of other formerly perceived as bulletproof financial institutions yes

there was an event and a whole lot of risk and we almost died

financially anyway eventually the capital markets worked investors came to

trust the system again and they invested their money in the stock market with [Cash piles up]

staggering results in that the stock market went up some 400 percent in the

decade after the financial crisis so events are a real thing you have to

think about them until you don't [Man falling to the ground on a rocket]