How do you evaluate investment risk?

[DJRR]

Recent market volatility has had me thinking more about risk. How do you personally evaluate investment risk?

Personally I have never understood the concept of equating risk to standard deviation of returns. I only consider negative standard deviation a risk - I want positive standard deviation Maybe the hedge fund concept of maximum expected drawdown would be more appropriate?

I think many here people focus on portfolio survivability. I think that this would be true for me if I was in distribution phase. In accumulation phase I think the risk of lower accumulation is greater than the risk of loss. The market has an upward bias and stocks are the best performing asset class. That is what has led me to be 100% in equities until I am < 10 years from my cash out date. So I guess I am focusing on maximum expected value right now.

I think Ken Fisher helped clarify some of my thinking about stock risk. Only 4 options are possible:

1. Stocks are up a lot - I win big
2. Stocks are up a little - I win a little, but usually better than cash/bonds
3. Stocks are down a little - I lose a little, but win long term because 1 & 2 are more common
4. Stocks are down a lot - I lose big, especially if I retire that year.

I don't have his book with me, but #4 occurs less than 5% of the years and the distribution is skewed towards #1. He also has some interesting things to say about avoiding #4. It is not common, but some people have built a reputation by avoiding the blowouts vs. a buy and hold strategy.

Not to beat a dead horse, but it also reflects in your attitude towards the whole mortgage debate. Personally I would rather prepay my mortgage vs. invest in a 10 year tbill at 3.5%, but I am investing in the stock market until I have maxed my tax deferred retirement and 529 options.

How do you currently evaluate risk in your investments?