We are surrounded by risk and take risks every day. In the morning just as we make our coffee we take the risk of trusting our milk seller not to adulterate our milk. On our way to office, we take a risk on the unknown Uber/Ola driver’s ability to drive and not kill us. On the road, we take a risk on hundreds of people of who are driving around us not to be insane and crush us to our untimely gory deaths.
We trust the elevator company to manufacture a functioning product and transport us to our office on the zillionth floor.Every day we take a risk on a lot of things, when we fly we take a risk on hundreds of crew members who are strangers to us to do their job in an efficient manner. When we go in for a surgery we take a risk on again a team of doctors and nurses to save our lives.
Risk is a part of living.
So all the things which are considered risky are not so awful.
When I introduce investors who have never invested in equities to this concept that equity risk is not so terrible they are a bit bewildered. Most of them equate investing in equities to gambling.
I recently read a para accredited to Howard Marks and it sums up what risk is quite succinctly.
“Risk is not uncertainity. It is not volatility. At its core, risk is the likelihood and magnitude of permanent loss. It is the probability of collision between a detrimental event and a lack of planning ,resulting in a permanently negative outcome of some potential size.
“Loss is what happens when risk meets adversity”.
Many investors get comfort from the fact that when they buy a well researched stock , there is a very dim possibility that their investment would go to zero. Yes, the price may move up and down, violently sometimes but if the business model and management ‘s integrity is not suspect that the probability of total and permanent loss of all the capital invested is extremely low.
Yes, equity investing is technical. One has to buy stocks when markets are not overoptimistic, prices have not skyrocketed and valuation is not crazily high.
If you have chosen a good advisor and have not put all your eggs in one basket and have the ability to stay invested for at least three to five years or longer then its quite likely that you will earn a handsome return on your investments. The mutual fund route mitigates risk in equity investing a lot.
You have to ask yourself that if the value of your equity portfolio falls suddenly by 20-25% , would it make a difference to my life? If yes, then equity should be smaller part of your portfolio. Opt for fixed income options and the government backed ones may suit your needs and mindset more.
That is not to say that equity in an investors portfolio cannot fall more than 25% . But there are very few instances in markets when stocks have fallen more than that. Yes , many of us remember the trauma of the Big financial crisis of 2008 ,but after enduring the unbearable pain markets eventually did move on and went on to scale new highs.
As the old adage goes, “There ain’t no such thing as a free lunch”. Creating wealth involves taking some risk which is no more or no less than your everyday risk which you take unconsciously.