Understanding Risk
We often talk about risk in my industry, and we forget that it can sound like a foreign language to those not in our industry or to those who are not experienced investors. Understandably, some may even find it scary. Even a loss on a trading or policy valuation screen that will soon recover can produce a flood of emotions our rational minds aren’t able to readily shrug off.
I think the best way to understand what we mean by risk is to think of it as uncertainty - in essence that an investment’s actual return may differ from what is expected.
Sometimes people have told me they believe ‘high risk’ is a scam, when in reality the two are very different - a scam will usually try to convince investors of its low risk, usually while offering very high returns. A risky investment will often be much clearer, and even when unregulated, stating openly that it’s possible to get back less than what was invested.
Risk is subjective - it’s an entirely personal and situational preference. Some investors love high stakes and won’t sleep if they aren’t getting double-digit returns regularly. Others will run a mile if they see a few per cent above inflation offered on a long-term bond or fixed deposit account that isn’t backed by government ‘guarantees’.
Even very mainstream shares and indexes can and do fall - sometimes dramatically. I wrote about how at least twice in the history of Warren Buffett’s Berkshire Hathaway, investors have had to contend with 50% drops. In each case it recovered and went on to bigger and better things but if an investor was not ready to see such an event, or worse, actually needed to cash in around the time of a dip that would be disastrous in their eyes.
Risk can never be entirely removed - indeed the reward for investing is risk exposure. But how much risk, and when you take it, and for how long, is something you need to be clear about - and even if you enjoy very high risks you can still take on diversification, insurance and keep lower volatility reserves just to smooth over any losses and give yourself time to recover. The problem usually occurs when people don’t understand their risks, and also don’t understand how to manage those risks.
Understanding your approach to risk is vital to your success as an investor. It will also help you see where you are most susceptible to being scammed, or indeed to missing out on a good investment because it’s not perfect and ‘risk-free’.
If this article was interesting consider supporting my work by sharing it over your social media or with friends you think can benefit from it. Thank you.
#thoughtsfortheinternationalinvestor #normanloweinvest #investmentrisk #investing #diversification #investing #financialplanning #risk