Risk Management, Trading & Portfolio Strategies

Protecting your investments from an alien invasion?

Extreme risks can affect the stock market.

Extreme risks can affect the stock market.

Most investors consider risks of some sort when managing portfolios. Political instability, war or an energy crisis can have an effect on the stock market, and most traders keep that in mind when making financial decisions. Should an alien invasion be added to this list of potential threats? Possibly, according to a working paper titled "Extreme Risks and the Retirement Anomaly," published by the University of Pennsylvania's Wharton School of Business. 

In an interview with MarketWatch, Tim Hodgson, the paper's author, said that the report's intent is to encourage investment managers to consider the possibility of unlikely catastrophes when making decisions. In the paper, extreme risks are divided into three categories: existential, severe and mild. Existential risks like alien invasions, cosmic threats and Earth being pulled out of orbit aren't a true concern for investors, according to Hodgson, because money would be least of everyone's concerns if such events occurred. 

He did note, however, that the risks in other categories should be watched closely.

Severe risks include: 

  • Biodiversity collapse
  • Food/energy/water crisis
  • Nuclear contamination 
  • Pandemic
  • Political extremism and anarchy.

Some mild risks are: 

  • Cyber warfare 
  • Deteriorating public health
  • Infrastructure failure
  • Global trade collapse
  • Terrorism.

"The 'severe' ones are probably the most important in that they will affect all investors," Hodgson told the source. "The 'mild' ones are only mild in the sense that they probably won't affect all investors simultaneously, but would be bad if they happen to affect you."

While Hodgson's target audience is institutional investors, individual traders should keep extreme risk in mind as well. In addition, individual investors should also consider using automated risk management tools such as those offered by SmartStops. 

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