Source/Contribution by : NJ Publications
"The biggest risk is not taking any risk.. In a world that's changing really quickly, the only strategy that is guaranteed to fail is not taking risks." - Mark Zuckerberg, Facebook
In order to grow, we need to take risks, in businesses and in our careers, we need to walk up the hill to see what's lying ahead, we need to explore ourselves to find our true strength. Before we take the risk of shifting from Content Department to Sales Department of our organization, how do we come to know what are we really good at. Risk and return go hand in hand, you want to become rich, you must take the necessary risks. Among the two major financial asset classes, Equity and Debt, Equity is generally associated with risk and Debt with safe and steady returns. Indian investors have been playing too safe with their investments, our investments are dominated by Debt, our portfolios are largely concentrated with FD's, PPF, RD's, traditional insurance policies (since we get a fixed amount on maturity), Post Office Schemes, etc. Even young investors in the early stages of their careers aren't assuming any risk.
As highlighted earlier, there is a direct correlation between Risk and Return. The problem with being too conservative is it leads to sub optimal returns over the long term, which is not a sustainable approach for realizing long term goals.
Many investors religiously invest in PPF for their Retirement. Let's understand the Risk Return paradox through an example in this direction. Let's say an investor (aged 35) invests Rs 10,000 every month in PPF for his Retirement goal. This guy would get Rs 91.48 Lacs when he retires (when he'll be 60). Had he invested in a product with a better return potential like an Equity Mutual Fund, if he would have been SIPing this Rs 10,000 in a diversified equity fund, he would have got Rs 1.7 Crores when he retires. And Rs. 1.7 Crores looks way more reasonable to fund ones post retirement life, (which may stretch upto 30 years) as compared to Rs 91.48 Lacs. An extra 4% return could have funded another decade of this investor's retirement.
On the other extreme end, there are some investors who understand the paradox and take supernormal risks to get extraordinary returns. There are investors who do commodity, future trading, intra-day trading, etc., but these are the ones who lose the most money.
So, the question that arises here is, how much risk should you take?
The risk you should take is dependent upon a number of factors, viz.
- Your financial position: income, expenses, assets, liabilities;
- Family responsibilities;
- Your age;
- The time you have in hand for your goal to arrive, etc.
However, the risk quotient is always subjective, it varies from case to case. The Risk should be in conjunction with the returns you need. The real risk arises when the value of your investment is less than the value of your goal, what happens in between doesn't matter in the end.
The Golden Rule is Young Investors should take more Risk and the Old Ones should take less risk. But what if the retirement FD of the old investor is not enough to last him for the next 20 or 30 years. Will it be prudent for the investor to continue invested in the 8% FD providing safe and stable returns? Probably No. He needs better returns from his retirement corpus, to provide for his expenses till he's alive. For this, he must expose his corpus to some risk, to earn the return he requires to survive.
The bottomline is, if there is a difference between your risk appetite and the risk you require, you need to bridge the gap. Sometimes, it is ideal to take risk even at 60. We must understand that in order to create wealth/have the required money to actualize our dreams, we must take the necessary risk. Great things never come from being in your Comfort zone, because in the end, we only regret the chances we didn't take earlier.
So, are you taking enough risk?