Managing Risk: Take a Page From the Pros.

(From BusinessWeek)

Ask any money manager what separates the pros from novice investors, and he'll whisper two words: risk control. The experts know not only how much they expect to make on an investment but how much they can possibly lose. Yet most 401(k) investors just think of the upside when they put their money into different mutual funds. If they do think of the downside, it is only in vague, undefined terms. If you're not willing to risk losing some money, chances are you'll never make enough to retire. A basic tenet of financial markets is that investors are rewarded for the risk they take. Stocks, which are more volatile in their price movements than bonds, have outperformed bonds over the past century. Sure, you have to take risk, but how do you quantify it? RiskMetrics Group, formerly the in-house risk-management unit of J.P. Morgan, has developed tools to stress-test individual investor portfolios that are similar to those used to analyze risk for its blue-chip clients, such as Charles Schwab, Goldman Sachs, and, of course, J.P. Morgan Chase. (These tools are available at the firm's free Web site, RiskGrades.com.) Such ``value-at-risk'' analysis is not without its critics. The Big complaint: it ignores any qualitative insight an adviser has to offer about the portfolio's individual securities or its fund managers. But it can help you…