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.

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.

Do share if you found this useful

About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of freefincal.com.  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, 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. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
Want to conduct a sales-free "basics of money management" session in your office?
I conduct free seminars to employees or societies. Only the very basics and getting-started steps are discussed (no scary math):For example: How to define financial goals, how to save tax with a clear goal in mind; How to use a credit card for maximum benefit; When to buy a house; How to start investing; where to invest; how to invest for and after retirement etc. depending on the audience. If you are interested, you can contact me: freefincal [at] Gmail [dot] com. I can do the talk via conferencing software, so there is no cost for your company. If you want me to travel, you need to cover my airfare (I live in Chennai)

Connect with us on social media


Content Policy

Freefincal has original unbiased, conflict-of-interest-free,  topical reports, reviews, commentary and analysis on all aspects of personal finance like mutual funds, stocks, insurance etc. All guest authors and contributors to the site also do not have any conflict of interest. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. No promotional content We do not accept sponsored posts and link exchange requests from content writers and agencies. This is our privacy policy Our website is non-profit in nature. The revenue from the advertisement will only be used for hosting charges, domain registration charges, specific plugins necessary for traffic growth and analytics services for search engine optimisation.

Do check out my books


You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingMy first 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 WantGamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantMy second 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

The ultimate guide to travel by Pranav Surya

Travel-Training-Kit-Cover 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 ₹199 (instant download)

Free Apps for your Android Phone

All calculators from our book, “You can be Rich Too” are now available on Google Play!
Install Financial Freedom App! (Google Play Store)
Install Freefincal Retirement Planner App! (Google Play Store)
Find out if you have enough to say "FU" to your employer (Google Play Store)

Blog Comment Policy

Your thoughts are vital to the health of this blog and are the driving force behind the analysis and calculators that you see here. We welcome criticism and differing opinions. I will do my very best to respond to all comments asap. Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete the entire comment or remove the links before approving them.

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.

Leave a Reply

Your email address will not be published. Required fields are marked *