Capital at loss risk is a simpler measure designed to speak to our behavioural aversion to losing money. It shows the likelihood an investor will end up with less than they started with. That is great for people who are hard-wired against losing a single penny of their cash, but does nothing to show how inflation erodes cash over time, or how much potential upside the investor is excluding themselves from by taking a cautious approach.
Measuring the probability of a portfolio delivering less than the return on minimum risk investments, such as gilts or cash is a useful way of explaining the pros and cons of investing in higher risk assets. This way of looking at risk is particularly useful when showing investors how asset classes with a higher risk/return profile tend to become less risky the longer the investment is held.
Risk measures are like any other tools – you have to use the right one for the job if you want to achieve the best possible outcome.
Andrew Storey is technical sales director at eValue Investment Solutions
