ERM What Does It Mean? Enterprise Risk Management 101
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Key terms
- Risk ToleranceYour ability and willingness to lose some or all of your original investment in exchange for potentially greater returns. Depends on factors like age, income, and financial goals.
- Sequence of Returns RiskThe danger that poor investment returns early in retirement can permanently deplete a portfolio, even if average returns over time are adequate. Withdrawing from a declining portfolio locks in losses and leaves less money to benefit from future recoveries.
- Active ManagementAn investment approach where fund managers make deliberate buying and selling decisions to outperform a benchmark index. Active funds charge higher fees than passive funds, and studies show the majority of active managers underperform their benchmarks over time.
- Risk-Adjusted ReturnA measure of investment performance that accounts for the amount of risk taken to achieve returns. The Sharpe ratio is the most common metric, comparing excess returns to volatility. Higher risk-adjusted returns indicate more efficient investing.
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