Many of us spend a lot of time understand products, options and avenues to make our investments. In the process we want to ensure we get the best price, cheapest cost, lowest charges, minimal fees and expenses etc. Once we are through all of this we come to the very important aspect of risk!
In my view this is least important or atleast not as important as it is made out to be.
The reason we feel this is most important as most advisors will ask you questions and try to profile your risk taking appetite. Risk and its impact is blown out of proportion and that is perhaps why we place so much of credence on risk and management of it thereof. In my view risk management today is presented and used by most advisors as a marketing concept more than a financial concept. Most people don’t understand risk and thus how it is to be managed. If you as a consumer chose say balanced risk you are thinking that half my money is safe. You are saying this from an immediate reactive perspective as you are scared and thus feel that atleast half my money is and should be secure. In tough times when you see that gold is going up, deposit and fixed interest products are going up and the stock markets are falling you think better to earn something than to earn nothing and worse lose what we have.
But in that process you pay a huge price albeit unknowingly. For e.g. if you decide to invest in an diversified mutual fund for the next ten years it is almost certain that you will make money and far more money than what you would make in a FD or PPF or similar. So where was the risk then? The risk naturally was to have invested into a fixed return producing product. The more you invest here the larger is your risk of not having enough and as you grow older you have lesser time to build a wealth corpus before say retirement or the time you choose to quit active work.
It is true that with fixed return type of products you have a tremendous feeling of security and that you know for sure that your money is growing. The unfortunate part is that your need for money in future years is growing more rapidly than the growth of your money. The other unfortunate part is that with wealth creating assets like equities and real estate the growth is enormous in cycles. There may be no growth for some years, negative other years and rapid in some years. Overall you come out hugely positive over a substantially long time say 8-10 years.
Say if you had invested a few thousands in Infosys, Wipro, L & T etc a decade ago you would be smiling all the way. That said it is difficult per se to imagine such mindboggling and profitable scenarios. Hence Financial Planning lays a scientific methodology for you to understand and manage risk better. The longer the goal you have, the higher can be the risk quotient of that investment and it requires a substantially smaller deployment. This also helps you enjoy life, not be worried about investing large sums of money all your life and gives you a feeling of solid control over your finances. Yes the planner must help you all along the way else it may turn out to be a time and energy consuming affair. He can help you control your deployment into wealth generating assets steadily and regularly. That way your risk is mitigated significantly. As a investor if you plan to build long term wealth you do not need to decide and worry on risk levels. Understanding it rationally and playing it well should be the hallmark of your financial strategy.
