How do you understand the correct concept of risk?

Risk means volatility and volatility is inherent to risky investments. You would be more worried if your capital fluctuates but you would not be so perturbed if your profits fluctuate. Having said this, you must first allow for profits to get created, which require time and patience. Then if profits fluctuate it is better than your capital fluctuating. Risk of capital erosion diminishes as profits build up with time. Capital will fluctuate in the beginning but over time, say a couple of years then it’s only the profit. You can still take home 14% to 16% average returns each year totally tax-free. Now tell me where is the risk here? (To profile your risk capacity, click here)

Gaining more conviction, how?

It is very important to come to your own conclusion. To give you an example if you did analysis of say some FMCG (fast moving consumer goods) company and came to the conclusion that this company has a great strategy and will continue to grow at 15% for the next decade – in my view that is the safest, brilliant and a highly rewarding investment avenue that you have discovered. So then why fear putting more than 50% of your money? But this comes out of knowledge and research which comes by investing in your own self, that is, investing in learning and building investment skills.

What is the greatest fear?

Not trusting your own self. Your greatest enemy is you, yourself and not the stock market. Don’t sell when you see a good investment is down by 20 or 30%. Don’t be timid and act in panic. Understand it is momentary and not perpetual. Taking the same example above, if you see prices down it’s a time to buy and not to fear and eject out of the investment. If you want more proof just rewind to May of 2006, the stock markets fell by 30% or so and by now October 2006, much of that fall has been retraced. If you sold our earlier, you are probably still waiting to re-enter. Having fear is understandable but irrational behaviour happens due to lack of knowledge. (Drive money, don't let money drive you )

If you have to do something right, you got to have the learning and skills to do it right, else like they say don’t play with fire that you don’t understand.

Kartik Jhaveri, an expert at Financial Planning, is a Certified Financial Planner and a Chartered Wealth Manager. He may be reached at kartik.jhaveri@transcend-india.com.

Disclaimer:

The contents of the above articles are the intellectual property and copyright of the author, Kartik Jhaveri. No part may be used or reproduced in any form or manner. If you choose to act upon the information contained in the above article it is at your own risk. This article is purely educative and you are strongly advised to consult an expert prior to taking any significant decision.