Risk is such a commonly used word in our daily lives. It is also the one, which is not fully understood. The term we more often use is “chance”.
Let’s use this chance to understand risk.
What is risk?
Risk is the uncertainty that we face when we venture into the ‘unknown’. If I could express it in the following dilemma:
- Should we launch the new product?
- What if I live longer?
- Should I quit my job and join this startup?
Different ways to refer to the same thing… the unknown. What if it doesn’t work out?
Risk is the uncertainty that accompanies when we do something that we don’t know about or don’t know enough about.
Another way to understand risk is, “it is the chance that the actual outcome of an event or action will be different than the expected outcome“.
As a society, we do not prefer risk. While we tend to avoid taking risk, the fact is that risks, taken well, can pay off handsomely.
Risk in Investing
There is an overblown fear of risks in investments. And that is because of the way we perceive investing and the lack of understanding about our risk taking capability.
We choose safe FDs and PPF for long term growth and volatile stocks and other market linked investments in short term. Strange!
So, on the one hand we do not understand risk itself and then we fail to apply it adequately in our context.
The key lies in making an effort to understand your own risk taking capacity and then choose your investments accordingly.
I will extend this thought further and ask you the big question.
How much risk can you really take?
If you ask a sage, he would say, “only enough and no more.”
Coming back to the mortal world, I am not sure if it is really possible to place a perfect number or a score or a percentage to your risk taking capacity.
However, some questions can help. Based on my interactions with several individual investors over time, I have created a set of questions, which you can also use to assess your risk taking capacity.
This is not a foolproof questionnaire. As I said, the idea is to help you to understand your own risk taking capacity.
So, let’s go.
9 questions to help you assess how much risk can you take
Mark your answers as you go through the questions.
- What is your current age?
- (a) Less than 30 years
- (b) 30 to 45 years
- (c) Over 45 years
- Which one are you?
- (a) Salaried – Fixed income secured job
- (b) Professional – Doctor, Chartered Accountant, Company Secretary
- (c) Freelancer – No steady income
- How many financial dependents do you have?
- (a) 0 to 1
- (b) Upto 3
- (c) More than 3
- What type of holiday are you more likely to take?
- (a) Adventure holiday – Scuba diving, Bungee jumping, Mountain trekking
- (b) Go to a resort and just relax
- How do you learn about investing?
- (a) Through reading books, websites / blogs
- (b) Through friends and colleagues
- (c) My advisor does it for me
- Which one of the following explains the rule of 72?
- (a) A thumb rule to understand the power of compounding
- (b) An investor should have 72 investments to achieve proper diversification.
- (c) It will take 72 months at least for any stock to deliver returns
- Which one of the following are you more likely to invest Rs. 100 in?
- (a) Where you can potentially get Rs. 130 but you can also lose Rs. 50
- (b) Where you are assured to receive Rs. 110 without any risk of loss
- (c) Rs. 50 in each of the above
- Which one of the following is true about investing in stocks?
- (a) Time in the market – you have to remain invested for a long period of time
- (b) Timing the market – you have to enter and exit at the right points to make money through stocks
- What is the current level of your investments?
- (a) Enough to take care of my financial goals
- (b) Somewhat enough to take care of my financial goals
- (c) Not at all enough to take care of my financial goals
How to understand your risk profile?
The answers would tell you your risk taking capacity. If you have more of As as your answers, then you have a high risk taking capacity; if there are more of Bs or Cs, you have a lower risk taking capacity.
So, how much risk can you take?
Please Note: These are not the only factors to assess your risk taking capacity. There can be many more.
The Money Master program will go deep down in helping you understand the phenomena of risk and how can you win with risk.