Advertisements

Taking a “calculated risk” on your investment


 

English: Risk-Return Indifference Curves

 

 

“Is there any place I can invest and get a minimum fixed 12 % return per annum?”

As a financial planner, I often get such queries from people – friends/acquaintances/clients. There are others who read about some new public offer for investment plans or ULIPs  that offer attractive bonuses/ guaranteed return etc and want to check if their claims are authentic.  If someone were to tell them that there are indeed such schemes, I am sure the majority of them would invest.  And why not? What can be better than a fixed return with no risk of losing your capital?

But try telling them to take a minimal exposure to equities say about 10 – 15 % to meet their return expectations, and the conservative/risk averse ones will back out immediately, and more than half of the rest will think twice. Why? Because of the RISK associated.  The risk that the equity part will underperform giving them lesser than expected returns; or worse still, they may not even recover the principal invested.

With where the interest rates are today, if ones chooses not to risk his principal at all, he or she may find it difficult to earn enough returns to cover the inflation after accounting for the taxes. And to increase the possibility of earning a better return, means taking more risk!

“ Risk comes from not knowing what you are doing”

This is a famous quote by Warren Buffet, the famous American business magnate and multi-millionaire who made his entire fortune by investing in stocks – a high risk investment. Of course, one of the reasons he was consistently successful and made money is because he did not put his money based on speculation, but after a lot of research and hard work, understanding the stocks he was investing in.  In other words, he took a ‘calculated risk’.

What exactly does “calculated risk” mean?

Calculated risk means to take a risk after careful research and evaluation and taking in to consideration all the possible results- good and bad. In investment terms, it means that one has carefully evaluated both the upside and downside potential of the financial product before putting his or her money, and –

  • The investor has reason to believe that there is a greater probability of a profit than a loss.
  • The upside, if it happens should be beneficial enough to justify the risk taken.
  • The downside, if it were to happen, should not be something which the investor cannot handle or has a long lasting impact/irreparable on the investor’s finances.

More importantly, apart from financially being able to handle a downfall, a calculated risk taker is also mentally prepared to absorb the loss. It is natural for one to say – “How I wish I had not made this investment”.  But on the contrary, an informed investor and risk taker is more likely to think – “it is unfortunate that the investment didn’t meet my expectations, but it sure had the potential to do so.” He or she understands that – In hindsight, everybody is wise!

Advertisements

One response

  1. I am extremely impressed along with your writing abilities, Thanks for this great share.

Have a query/an opinion/a comment to make? Would love to hear it !

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: