Risk Aversion Almost Always Implies Risk Ignorance!

Published: March 18, 2015 at 8:30 am

Last Updated on

If you type the following in Google: “Sukanya Samriddhi account risk averse”, you will find several articles that suggest that the Sukanya account is ‘suitable’ for risk averse investors.

Such statements make me want to throw up. Risk aversion almost always means that the person does not understand the risk involved with a particular investment objective.

Almost always, this means that the ‘risk averse’ investor is unable to fathom the impact of inflation and would like the comfort of a steady return which is ‘higher’ than other fixed income returns.

How many of these investors, who value ‘peace of mind’  associated with fixed returns, are aware that there are only two ways to beat inflation?

1) invest as much as possible in assets (as part of a diversified folio) which have every chance of beating inflation

2) invest an enormous sum in a fixed income instrument with a return lower than inflation.

How many of these investors can justify their choice of a fixed income instrument with adequate investment? How many are aware of the kind of inflation associated with services related expenses like a child’s education and marriage? How many have even bothered to use a goal calculator?

Risk Aversion most often implies Risk Ignorance.

I can never bring myself to fan the flames of ignorance by suggesting ‘solutions’ for risk-averse individuals.

A risk-averse individual who does not understand the risk of not investing in equity has only one ‘choice’: invest a lot! If they took the trouble of using a goal planner with realistic inflation levels, they would realise that the monthly investment required is a typically lot more than they can handle.

There is no free lunch. If you don’t want to stomach the ups and downs of the equity market, you will have to pay a heavy price in terms of a higher monthly investment. Only then would products such as the Sukanya Samriddhi account become suitable for ‘risk averse’ investors.

Financial advisory involves gauging the individual’s risk appetite, analysing the risk profile of the goal and convincing the person to align investments to a goals risk profile and not individual risk appetite. This a huge challenge for a financial planner- even for those with the passion for advisory.

As someone who does not have the  ‘stomach’ for one-to-one financial advisory, I believe my job is to the provide clinical solutions in line with the risk profile of a financial goal.

Suggesting inefficient solutions to risk averse individuals is like evaluating  certain sections of a class with a relaxed set of rules because they can’t handle the rigour.

This is a ‘disservice’ because life subjects everyone to identical rigours -in this context, inflation.

Do share if you found this useful
Share your thoughts on this topic at the  Reddit freefincal_user_forum

Reach your financial goals like a pro! Join our 1600+ Facebook Group on Portfolio Management! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!) or you buy the new Tactical Buy/Sell timing tool!
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. We operate in a non-profit manner. All revenue is used only for expenses and for the future growth of the site. Follow us on Google News Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any kind of paid articles, promotions or PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps