Strategy: Risk,lies ‘n logic of investment

What is the greatest lie in any investment advice? Which is the greatest marketing façade used in any type of investment management?

Written by Kartik Jhaveri | Published: February 27, 2012 2:17 am

What is the greatest lie in any investment advice? Which is the greatest marketing façade used in any type of investment management? It is the concept of “risk” and questions related thereto. What is the level of risk you are comfortable with? What is your risk appetite? Such questions serve little purpose. The objective is simply then to match a product with the answer you provide. A product is sold and an investment is made with little or no credence to the outcome or future implication. We talk and hear this language when we talk about investments with just about anyone. It is as if risk and investment were sides of the same coin. The concept of risk is a myth and the sooner we understand the better it is.

Risk and fear

Portfolio allocation or planning as we know popularly is about distributing money across various classes of investment. Why is this done? Is it diversification or fear? Neither is predominant viz.,fear that a particular investment may not work out well or that ample diversification cannot be done within a single asset class. Risk and fear are not inversely related as it is made out to be. Fear and fluctuation of the value of an asset are directly related. That’s logical. Economics and time mitigate such fluctuation and thus investment in an asset class becomes justified.

Risk is chance or a probability. So when the outcome is based on rationale of economics and time,question of risk or chance or probability really does not arise.

Risk and advice

If you are going to get the right advice,then risk has no role to play therein. If risk has a role to play the advice is not necessarily going to be sound. Good advice should be advice that is given in the interest of the advice seeker. Advice also becomes appropriate when it is fine-tuned to the socio economic fabric of the city and country in which advice is being rendered. So if we were to go with the presumption that in India there is a need for general mass affluence,then the possible way beyond education and career is obviously investments. It is pertinent to note that speculative investment advice has element of chance or risk but this is absent in prosperity driven advice.

Risk v/s logic

* If you do not have enough money for some purpose you will have to create it. Hence depending on the time you have on hand you have to invest it in a place that will generate money at a higher and faster speed. For example,you are 50 and thus have a decade to retirement or you want to create a pool to pursue that cherished dream.

* If you have enough you can afford to take it easy. Nothing is wrong then with an endowment policy that gives you between 2 per cent to 4 per cent or a fixed deposit if you have inherited billions of rupees.

* If you can see that you will need money in the near future,you are likely to take more care of it,guard it ever so closely. So even if you are 25 and need money to buy that bike or make that down payment in due course you would logically not take chances with such money.

* If you do not see any visible need of money for a very long time you are possibly in a position to experiment. You are 40 and may have some surplus which your children may not need for the next 15 years,so why would it be so wrong to invest into something that will grow better. Another example is that you might be 70 and want to leave behind some gifts and legacy for children and/or grandchildren.

As you can see in any of the above situation and examples the standard process of risk profiling would just not apply. Often if you think hard you may already have the answers. It seems like common sense and concept of risk beings to disappear when we start considering logic.

The next time you start the process of making an investment and you start thinking about what level of risk you should take based on age and other formulae thrown at you; step back and re-think. Do you need to do what you are doing? Do you need to simply protect the money? Do you need to create wealth? Do you have time on hand? Will long term demand and supply increase the value of your investment?

There is nothing really like risk. It is just that some assets fluctuate in value and some do not. Both are good and both are necessary. Decisions must be based on objectivity and not how you feel at that day and time.

— Author is Director,Transcend Consulting
kartik@transcend-india.com

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