I agree it's waffly, and it doesn't really address the fact that most amateur investors neither intuitively understand risk nor to they apply and systematic risk assessment and management.
Professionals don't guess risk unless they have to, they calculate it and related volatility to come up with "value at risk". For example the make up of the investments in the fund that pays my main pension is such that the 3 year value at risk on a 1 in 20 basis is about 25% of the value of the assets. In other words there is a 5% chance, as near as can be estimated by the investment consultants, that the fund value might dip 25% below its present value at some point in the next 3 years. This sits alongside a target for investment returns. The trustee can reduce the value at risk, but will either have to pay for the protection or accept a lower projected return.
Amateur investors and I have to include myself to a large degree firstly don't have the resources to do this but also don't really rationalise in that way. They will search for higher returns and in some cases either just put risk to the back of their minds or simply decide whether they feel lucky. Or they will focus on risk and hope the rewards take care of themselves.
Neither do they really understand the relationship between risk and reward. Typically when people seek advice on their pension investments they will be asked whether they want to take a low risk, a medium risk, or a high risk. Many treat this simply as a question about their general attitude to taking risks with their life savings, and 'sensibly' select "Low". The problem with a 25 or 30 year old doing this is that he or she will probably not be able to achieve the returns they need over perhaps a 30 year period by putting the money in the building society. They are long term investors and as such can and usually should sensibly take a higher level of risk, albeit diversifed as far as practicable. The stock market probably will drop by 40% at some point in the next 20 years but that really shouldn't affect their thinking very much. There's plenty of time to move gradually into lower risk investments to protect them against that happening to them the week before they retire (bearing in mind that even at retirement, they might still be long term investors with part of their pension fund).
Does crypto have a role? With hindsight, it would have been a brilliant idea. But if you had been making that decision say 5 years ago, would it have looked reasonable? Truth is I suspect that it is very risky, but potentially very high reward.
How will it work in relation to economies? Perhaps like gold, which people use as a store when economies and normal investments look risky. How will they be affected by inflation? GBP inflation is driven by UK's competitiveness/GDP growth vs. its peers, and by interest rates. Bitcoin AFAIK accrues no interest, and "inflation" is really just a function of price in the way that gold is.
If I'm honest I really don't understand it and I don't trust myself to know whether it's a good investment or not. And I am sure there are risks with it that almost nobody considers or has thought of.
Last edited by: Manatee on Fri 21 May 21 at 15:47
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