What is Risk?

Published: October 4, 2016 at 5:41 pm

Last Updated on

Risk comes from not knowing what you’re doing” is one of the many famous Warren Buffett quotes. Risk also comes from an inability to apply context to a (WB) quote! For example, Mr. Buffett has repeatedly stated that volatility and risk are very different from each other.  Statements like these have been used to mis-sell and mis-buy equity and equity-based products.

Risk is not recognising context

Risk is the permanent loss of capital and volatility a temporary loss. However, this is true only if I am not going to redeem anytime soon. That is my goals are years/decades away. If I hold 70% in equity and my goal is due in the next few years, then risk = volatility.

Risk is not starting early

It is not practical to know everything about equity as an asset class and then start investing in it. One will have to get started with some basics in mind and learn on the fly. Starting early makes all the difference here. A 25-year-old can learn on the fly at a much more leisurely pace than a 35- or 45-year-old.

Risk is being short-sighted

Most of us screw up money management by focusing on tax saving alone. We commit large sums of money for several years in unsuitable products and realise our folly later. Often a little too late.

Risk is assuming that we can handle shocks

How many of us who claim that we have “large risk appetite” have actually experienced large shocks (in the stock market or elsewhere) and lived to tell the tale? Theoretically, equity investing is about staying invested through market ups and downs. Easier said than done.

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Risk is taking things for granted

I know many people who are still searching for the ideal life or health insurance product, assuming that will not die or get hospitalised during the several months they spend searching.  Only when life plucks one of our abilities do we realise how much we took that for granted.

Example: Do not assume your expenses will decrease after retirement!

Risk is the lack of a strategy

If we do not have an objective or goal for investing, we are lost, to begin with. A clear objective is not enough. A strategy about how to get there is needed. Many investors who can define their financial goals, do not have a solid investment strategy in place. A lack of conviction is often the cause for this lack of strategy.

These are some of the risks associated with our attitude. Financial instruments have different types of risks associated with them. More on that later. The best place to get a list of such instrument risks is a mutual fund scheme information document.

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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.
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3 Comments

  1. Hi,
    thanks for sharing information Risk.most of people will invest money in stock market without knowing any information about Risk factors.stock markets will have big risk. balancing risk other financial products like mutual fund,bonds,FD will help in reducing risk.

  2. Quotes by William Bernstein >> is what PF bloggers say

    “If you have acquired enough assets to retire on by staying in safe assets, then the only money that you should be putting at risk in stocks is the money you don’t need”

    >> Tendulkar and Saina nehwal should do monthly sip of INR 1000 in an ELSS fund

    ” if you are an older person and you are retired and you have sufficient assets, then you have two pools of assets. You’ve got your money and you’ve got other people’s money [excess return from investing]. Other people’s money is the money that you should be putting at risk. That doesn’t mean you can’t spend it. If that money does well, there is no reason why you can’t splurge on a BMW or first-class air travel. But don’t put the money at risk that you absolutely need to retire on.”

    >> Frugality and delayed gratification means you want and cant afford a Iphone7 but you will mock others who can afford buying it

    >> If you are 70+, put 70% of your money in stocks, ask your neighbour or IFA to manage the corpus because you have to beat inflation.

  3. Again, William Bernstein –

    Risk=(Capital Invested)/(Potential for future savings)

    For a 21yr old, denominator is huge, numerator is almost zero. –> Low risk
    For a 58yr old, it is vice versa.

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