Risk Management Lessons From 2008

by Geoff Considine, seekingalpha.com

Ben Stein recently expressed a feeling that many people share with regard to 2007-2008: how could equities lose so much value so fast? Ben puts it this way:

“…we have learned that even the most rigorous back testing of portfolios did not work during this period. The reason was simple — no back test allowed for as much stress as markets were under from late 2007 to fall 2008. There simply was no postwar historic precedent for markets to be as volatile on the downside as they were in 2007-08. Thus, back testing (very similar to stress testing) that called for maximum falls of, say, 33 percent simply did not work when markets fell as far and fast as they did in 2007-08.”

I am afraid that many people will come away from the bear market of 2007-2008 (even if it has now ended) with the idea that holding substantial allocation to equities is too risky if we can experience conditions like 2008. Certainly a drop such as we experienced in 2008 serves as a wakeup call with regard to risk management.   article

See also: Ben Stein