What is Risk?

“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.

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.