In the investment and finance sector, the risk is the uncertainty of your investment decision. It does not mean loss, hazard, etc. If it is not handled correctly, it may be a possible loss. So let’s get to know the idea of investment risk.
What does Google Say!
If you google the ‘risk‘ definition, the answer will be given as:
“A condition where the vulnerability of bad happening is involved.”
And then you hear the commercials saying:
“Mutual funds are subject to market risks”
Or people will say, stocks are not a good option of investment.
So, what’s a common man going to think about risk? You’re starting to wonder?
In my view, in the world of finance, both of these concepts are incomplete and meaningless.
The answer is here-
Understand the Risk in Investment
Risk is the situation of uncertainty when the result is unknown because if you are familiar with the outcome you would take action accordingly.
For instance, if you know that a company is terrible, the shares will certainly decrease; you won’t invest (you’ll instead sell for short). When offering a loan, if the banks know you’re not going to repay it, they’re not going to give the loan. Here, there is no question of harm or loss.
But if the banks give you the loan, the potential payments entail uncertainty. That is why the default risk is named.
You don’t know how markets can work in the short term despite comprehensive equity analysis, and so they are called market risks.
In reality, every day we take risks. We put ourselves in dangerous situations by crossing the road, driving to the office, and are not very concerned. Via some action, we learned to control them. Look at road crossing or speed reduction while driving, for example.
There are certain behaviours of investment in the same way. For instance, adequate emergency funds, long-term investment in good businesses, which have stable cash streams, etc. Then there will be no regular price fluctuations. At that time, you possibly would not be pressured to sell. Most people think that debt is good because returns can be improved and tax savings can be made. However, most managers who excel have minimal debt in their businesses and are willing to cover this debt at all times. This means that if things go wrong they have enough money to bail off the debt entirely. Since you are very confident that you can remain invested and gain money. Increase security; decrease the uncertainty.
Who takes the biggest risk?
If you are only paying as wages and you have savings, you may have a long-term debt, which is a significant portion of your expenses, for example, home loan. For 20-30 years you have to pay the fixed cost (EMI) for the loan whether your employer pays you the salary or not.
You bet that, regardless of future events, you will certainly make consistent EMI payments. That sounds like the greatest uncertainty to me since nothing is more unpredictable than the future. Sadly, most people prefer this unless they grasp the uncertainty of trade, finance, and money management.
Intraday-Traders take financial risks
Think of it now. Can you predict precisely whether in the next 1 minute the stock market will rise or fall? In the following 1 hour? At day’s end? One month? 1 year? One year?
Actually No. (There is a possibility of 50% correctness, but no one can say that with 100 % certainty). We like to foresee; we thoroughly enjoy it. We like to be solid. But in fact, no one can be certain of it, including experts or economists, despite much research.
But if you expand your time span, the probability of predicting correctly tends to increase. If you look at it for 5 years, the market is more likely to rebound and close positively. It’s sure to be good news if you consider 10-15 years
On Avoiding taking risk
Not investing your savings properly is like working hard, recruiting a lot of employees, to start your company. You work all day instead of getting them to work and you give them a long break. After 40 years, when you need their support, they’re lazy and too poor to help. Who’s at fault here?
The real uncertainty of inflation is not that it is now rising at such a high rate; it is that it is occurring slowly and quietly, sometimes unnoticed. Therefore, many do not think about investing seriously, which is really long-term uncertainty. The individuals who do not invest in equities and take small investment risks are also taking the real one.
This is because it is certain that inflation will rise in the long term and consume our buying power.
Many individuals see fixed deposits as good savings, but they don’t even beat inflation. They definitely give you the assurance of income from fixed interest= less uncertainty. No banks in the world, however, are ever going to give you more interest than the inflation rate. What does that imply? Average inflation in India is about 7-8% and no banks offer interest rates higher than this. So, if you still believe that income is your concern, you’re fooling yourself.
Instead of completely eliminating the risk, try to mitigate it. Learn to efficiently MANAGE it.
The primary takeaways are here:
- Don’t risk anything than losing you can handle.
- Concentrate on uncertainty before all else when uncertainty is high.
- The greater the confusion, the greater the trouble.
- Look for ways to get more incentives, where you lose less.
- Increase your perspective.
- Study, learn more, reduce confusion.
- Prepare, mitigate uncertainty, raise the incentive.
Till then, happy investing!