Risk goes far beyond the usual volatility-reward equation and applies as much to earning money as to investing it.
IN MY previous column, Are they Investing or Gambling?, I had shown a methodology of climbing the ladder of risk by according 5 extra percentage points to each rung of higher risk that investors climb. So if ‘risk-free’ government securities give you a tax-adjusted return of 17.1 per cent, the next level of risk, say a mutual fund, should give you 22.1 per cent and so on. This was a simplistic, back-of-the-envelope, directional look at risk. But what is risk? How much risk can we take without getting financial indigestion? Is one man’s risk the same as another’s? Or is risk-taking a highly individual activity, a solitary journey towards wealth creation?
What is risk? The most common way of defining risk is something like this: the fluctuation in the return on your investments and, leave alone the potential for or extent of growth, the possibility of losing all your money. There is also this commonly used mantra–high risks translate into high rewards–which need not be true all the time, as the recent carnage in technology stocks showed.
Opinion in Outlook Money