ShmoopTube

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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bunch of other formerly perceived as bulletproof financial institutions yes

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

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financially anyway eventually the capital markets worked investors came to

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

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

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

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

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