Are 401(k) plan sponsors looking at investment risk correctly? Or do they only think they're looking at investment risk correctly.

The singular most damaging relic of Modern Portfolio Theory is the rampart embrace of the 2nd Deadly Sin: The Joy of "Risk." A good 401(k) plan fiduciary knows risk tolerance (a.k.a. "loss aversion") has nothing to do with the appropriate investment, but more on that later.

What is the real definition of risk? Historically, it's meant focusing on the prevention of a downside loss. In the investment world, there has been a wide spectrum of definitions, most of which could be address by some form of diversification. Examples include market risk, industry risk, company risk, currency risk, etc…

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