Taking stock

A few years ago, in my work in portfolio risk management, I was given the task of conducting year-end backtesting. My team uses a mathematical model that estimates how often losses are expected to exceed a certain threshold (i.e., to lose more money) for a given period. In simple terms, backtesting is a way to check if the model still works. It reveals if the assumptions are appropriate, if the parameters are still applicable, or if there is a need to overhaul or scrap the model altogether. Skipping this process can be considered a mortal sin. It might mean one would not realize that they are already taking too much or too little risk in their investments.

While backtesting is valuable in managing financial assets, this concept is also important to be applied in life. Two close friends have separately reminded me of the need to process and to reflect on things I experienced in what has been a rollercoaster ride of the past 15 months.

Coming from a buy-side finance background, I cannot resist the temptation to frame this scrutiny of experiences using the lens of risk-taking. It fascinates me that the conservative nature of the portfolio we are managing at work somehow mirrors my personal risk aversion, not only in my career but also in my personal life. For instance, since I started working at the central bank seven years ago, I have been diligent in putting in the work, day in and day out, and taking certification exams almost every year (the only exception was one year due to the pandemic), with each sitting requiring sweat and tears and anxiety for me. Given such, it has been an outlier year of taking risks, which in my case means being in unfamiliar territory on numerous occasions after playing worst-case scenarios in my head a hundred times (never removing my risk manager hat) for each one.

The biggest upsides were seeing new places and meeting people. Never have I imagined spending Christmas with my high school friend and his relatives in Vienna, who treated me as their own family. Never have I thought about welcoming the new year in Paris, complete with the iconic Filipino spaghetti and (red) hotdog sticks, thanks to new friends. A core memory was also created when a World Bank colleague invited me to her home to have halo-halo and chicken inasal, and in true Filpino fashion, do karaoke. If I was not busy with coursework or doing laundry and groceries, weekends were spent visiting Stonehenge or the Harry Potter studio, trying indoor skydiving, or just exchanging stories in my friend’s Netherton Grove flat. Of paramount importance as well were discovering my extroverted self while in a multicultural environment during internship and building my confidence to do a lecture for central bankers through great support (and effective presentation tips) from colleagues.

I acknowledge that all these things happened only because of privilege. I was fortunate to obtain a much-coveted scholarship, to work for an employer that encourages further studies, and most importantly, to have supportive family, friends, and work bosses and teammates.

Nonetheless, it was inevitable that there were also downsides. I admit that homesickness was not a major concern for most of that time, as I did not miss the traffic and chaos back home. However, I felt sad to miss the birthday of my inaanak, and the joy of having good public transportation in a first-world country could not compensate for missing the opportunity to say my final goodbye to my Lola.

Like in investing, life is all about trade-offs. We often hear the phrase “high risk, high reward” but I think this requires a bit of nuance. Although being exposed to risky investments makes it possible to achieve high profits (often in the long term), it is vital to know that such can also make one vulnerable to deep losses if the risk is not managed appropriately. In life, this is also true.

Moving forward, my overly optimistic self would like to think that I have more courage now to take so-called calculated risks in my decisions, but I realized that sometimes you need that leap of faith. No matter how good you are at anticipating all the possible scenarios, from worst to best, surprises, both positive and negative, happen. I am reminded of a quote from one of my favorite books, Dr. Ronnie Baticulon’s “Some Days You Can’t Save Them All.” It says, “The greatest injustice you can do to yourself is to be mediocre … When you know that you have done all that you can, there will be no room for regret, shame, anger, humiliation, and frustration, no matter what.”

With the knowledge that at any given moment life may throw a curveball, an alternative approach would be to stay in your comfort zone and try not to take risks at all. However, by getting rid of the possibility of losses, you also deprive yourself of the possibility of the gains, the happiness, the thrill, and the fulfillment. That, for me, is the true risk of living—being afraid to live.

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Gervin Domingo, 29, is a financial market research officer at the Bangko Sentral ng Pilipinas. Views expressed in the essay are his and should not necessarily be construed as those of his employer.