Welcome, Sandbox friends.
Today’s Daily discusses:
risk can’t be reduced to a number
🧁 weekend sprinkles 🧁
Let’s dig in.
Blake
Markets in review
EQUITIES: Nasdaq 100 +0.42% | S&P 500 -0.05% | Dow -0.59% | Russell 2000 -1.01%
FIXED INCOME: Barclays Agg Bond -0.09% | High Yield -0.10% | 2yr UST 3.562% | 10yr UST 4.066%
COMMODITIES: Brent Crude +0.71% to $66.84/barrel. Gold +0.19% to $3,680.7/oz.
BITCOIN: +1.59% to $116,181
US DOLLAR INDEX: +0.11% to 97.642
CBOE TOTAL PUT/CALL RATIO: 0.86
VIX: +0.34% to 14.76
Quote of the day
“We have two lives, and the second one begins when we realize we only have one.”
- Confucius
Risk can’t be reduced to a number
One of the hardest concepts for investors to wrap their heads around in personal finance is risk.
The challenge? It’s maddeningly difficult to define AND it means something different to everyone.
Crack open a finance textbook and you’ll find long discussions about volatility, standard deviation, beta, Value-at-Risk, Sharpe ratios, Sortino ratios, Treynor ratios – you name it.
But here’s the problem: they’re not the end-all, be-all for protecting your capital. Immunization isn’t that simple here.
The limits of risk metrics
Most risk measures are formula-driven, which gives the impression of objectivity. In reality, many of the inputs are subjective. That alone makes them imperfect.
And risk itself? It’s multi-dimensional. Picture the mythical Hydra, the multi-headed water serpent of Greek mythology. Cut off one head, and two more appear. Risk behaves the same way – hard to pin down, quick to morph. Risks you thought were dormant flare up unexpectedly. Existing ones return in new ways and different levels of magnitude.
Even those who constantly warn about risks run into trouble. Think of economist Nouriel Roubini, nicknamed “Dr. Doom” for his gloomy forecasts. He’s right on occasion, but his persistence earns eye-rolls. Worry too much about risk and you risk being ignored.
Risk as a master of disguise
Even when we think we’ve learned, risk has a way of sneaking past us.
Take bubbles. We know they happen, we study them endlessly – and yet they always fool us. Like a virus, each new bubble mutates just enough to slip through our defenses.
They always come back looking a little different each time. “This time is different.”
So, what can you do?
Given all this, what can you do to keep a cool head?
Don’t rely on any single measure of risk. Hedge fund manager Seth Klarman said it best: “Risk simply cannot be described by a single number.” Metrics are helpful but only as pieces to a broader mosaic.
Use history as a guide. Past cycles don’t predict the future, but they do define the range of outcomes for what’s possible.
Recognize that risk is personal. Risk isn’t universal – it’s situational. A market downturn hurts retirees drawing income but helps younger savers buying shares on the cheap.
Build a risk management system. Even a simple framework for monitoring and adjusting your exposure can go a long way. Risk management isn’t about perfection; it’s about iteration, discipline, and checks & balances.
Managing risk means accepting the right amount of uncertainty in exchange for the possibility of reward – then monitoring, adjusting, and repeating. There is no finish line.
And, as always, stay on target.
Have a great weekend.
Source: Project Management Institute
🧁 Weekend sprinkles 🧁
Here are the ideas, sights, and sounds that caught my attention this week – perfect for quiet time over the weekend.
Blogs
We’re Gonna Get Those Bastards – The Relationship Between Time and Money (Jared Dillian)
Podcasts
Anthony Pompliano with Ric Edelman – Financial Advisors are All-In on Bitcoin (YouTube, Spotify, Apple Podcasts)
Movies/TV Shows
Eddington – Joaquin Phoenix, Austin Butler, Emma Stone, Pedro Pascal (IMDB, YouTube)
Music
Bush – The Land of Milk and Honey (Spotify, Apple Music, YouTube)
Books
Nick Maggiulli – The Wealth Ladder: Proven Strategies for Every Step of Your Financial Life (Amazon)
Fun
Manager Terry Collins blows up on MLB umpire (Instagram)
That’s all for today.
Blake
Questions about your financial goals or future?
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Welcome to The Sandbox Daily, a daily curation of relevant research at the intersection of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. The information and opinions provided within should not be taken as specific advice on the merits of any investment decision by the reader. Investors should conduct their own due diligence regarding the prospects of any security discussed herein based on such investors’ own review of publicly available information. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily. Any projections, market outlooks, or estimates stated here are forward looking statements and are inherently unreliable; they are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur.
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