Millionaires avoid safety protect risk

In an earlier column ' Why millionaires are millionaires ' Sanjay Matai had talked about millionaires considering risk as their friend not a foe. In this excerpt from his book ' Millionaires don't eat cakes...they make them ', published by Network 18, he touches upon the concept of risk.

Aversion to risk is one of the most common reasons for widespread financial underperformance.

Why do most people avoid risk? The reason...they equate risk with loss. For them, taking risk is as good as losing money. That being the case, they prefer to keep their money in safe places e.g. the bank deposits. The word risk evokes fear. Therefore, the natural reaction is to look for safety.

However, there is a trade-off between safety and returns. If you prefer safety, you have to compromise on returns. Safe investments will keep your money safe. The probability that you will lose your capital will generally be low. But, at the same time, the returns that you will generate on such safe investments will also be low. Therefore, risk aversion is not going to make you a millionaire.

Without risk, there's going to be no riches.

In fact, 100% safety is also a myth. Keeping the money under your mattress may appear safe. Assuming no risk of theft or fire, it is true that you will not lose any money by doing so. But so also is the fact that many things become expensive as time goes by. You all are aware of the devil called inflation. As such, in future you may have to shell out more money to buy the same set of goods and services. Effectively speaking you have lost some money in the form of reduced purchasing power. Isn't this also a form of risk?

Therefore, there is no such thing as 'no risk' or 'zero risk'.

Besides, just as a coin has two sides to it viz. heads and tails, risk too has two sides to it viz. threat and opportunity. On one side is the danger of losing and on the other the chance to win.

But there is one key difference between the coin and the risk. Unlike the coin, risk doesn't always have to be a 50:50 game. You can suitably control risk to get more wins than losses.

Instead of hiding behind safe investments, you have to hide behind risk-protection tools.

Without fire, there's going to be no delicious dishes. Fire can burn your food. Yet, you use fire day-in and day-out because you know how to manage fire. You are aware that uncontrolled fire could cause serious damage. But you are not afraid as you have learnt to control fire (e.g. gas regulators). You have also built safeguards (e.g. fire extinguishers) to contain the damage in case of any mishap.

Same goes with risk too. Just as fire doesn't necessarily mean damage, risk doesn't necessarily mean loss. Just as you have learnt to manage fire, you have to learn to manage risk. Just as you have safeguards against fire, you have to build safeguards for risk too; to keep the losses to minimum should the things go wrong.

Running away from fire is not the alternative. Running away from risk is not the alternative.

The bottom-line, therefore, is that you have to welcome risks. The fundamental question, however, is how do you go about meeting risk?

- Are you ignorant about it? Or do you understand risk?

- Are you reckless about it? Or you learn how to manage risks before committing yourself?

- Are you venturing in unprotected? Or have you put together adequate protection against serious damage?

- Are you taking risk within your risk-appetite? Or are the risk levels beyond your bearing capacity?

Risks are of various types such as Default Risk, Volatility Risk, Liquidity Risk and Interest Rate Risk. You must understand the nature of each risk and how to protect your money so that such risks do not cause a major loss to you.

In a nut-shell, if you do not want to just remain a millionaire-aspirant Avoid Safety Protect Risk!