A ship is safe in harbor, they say. But that is not what a ship is built for.
Sailing out to sea comes with its inherent risks. There is the chance you’ll catch the wind in your sails and all goes well. But there is always the risk of sinking. Probably more so as you venture out on to unknown waters.
Now think of that logic applied to your investments. No matter how safe your investment, when you put your money out there, it goes out with a certain amount of risk attached to it. The market has volatility, vulnerabilities, political and economic factors, and other movements that are completely out of your control.
But just as there are good sailors, there are also good investors. The key is not in avoiding risk, but in taking calculated risks based on a complete understanding of your own position as the risk-taker, and knowing the best and worst possible outcomes of a particular investment decision.
Risk is often tagged with fear and negativity, but any seasoned investor will tell you it’s not all bad. Understanding risk, maneuvering it and protecting your investments against it are the factors that turn risk-taking into a thrilling adventure rather than a period of nail-biting anticipation.
Never make an investment decision from a place of greed. Make it from a balanced point of view, ask the right questions and assess your decision thoroughly before diving in.
When you’re facing a high-risk investment opportunity, there’s one real question to ask yourself: “Is it worth it and am I ready?”
Understanding Risk
Risk is not an outcome. It is the inevitable probability of varied outcomes: desirable, unsatisfactory or devastating. High-risk investments can take you to either end of that spectrum and typically, the fear of the ‘devastating’ extreme is what makes investors risk-averse.
Let’s take a look at a few different risks your investment is likely to face. You could face market risk from the fluctuation of equity value or currency exchange value. You could face liquidity risk when you need to sell your investment, but it doesn’t fetch you a fair price. Another very real risk is inflation, where the value of your investments falls behind the rate of inflation, dropping the relative value or purchasing power of your investment. As a working professional, you also face horizon risk – the risk of having to sell your investments at a loss due to a sudden loss of job or another unforeseen event.
Almost all of these circumstances are out of your control, and even though some might be predictable, they can never be drawn out as certainties.
It’s worth mentioning here the inherent risks that come with investment strategies like leverage, where investors fund their investments with borrowed capital to generate returns. While on paper it seems like a lucrative option with generous returns, an understanding of the risks involved is imperative. Your financial advisor should ideally be helping you to understand this kind of risk better.
Looking Inwards
Now let’s take a look at the other side of risk – you, the risk-taker. What you do know for certain about your investments is your readiness and ability (or lack of) to make them. You are aware of your financial standing. You can make yourself aware of all the possible outcomes of a particular investment. You are also aware of your threshold for loss.
An able financial advisor will always assess high-risk investments from the perspective of a client’s financial ability to take risk, and also, just as importantly, their emotional ability and willingness to take the risk. You might have heard before: Investment is a mind game, just as much as it is a game of numbers.
Questions to assess your risk-readiness
Here are a few questions to ask yourself to gain a quick and true understanding of whether or not you’re ready to play the big league.
– Where are you in ‘life’? Where do you stand in terms of family commitments and your career?
Stability impacts your ability to deal with the risky investments. If you’re anticipating a change of jobs, or are on the cusp of change in your personal life like an upcoming wedding or a child on the way, then you might not be in the best place to take on a high-risk investment opportunity. You might also feel the need for a top-up educational degree or some other form of expense that is important to furthering yourself in your career.
You could also be at the stage where you’re just about ready to make your first investment, and I highly recommend taking some sound advice if this is the case, no matter what kind of investment you’re considering.
Take a quick look at the phase of life that you’re in before taking the plunge.
– What are your finances looking like?
The obvious question here is, of course, whether or not you can afford the investment. But the pertinent question is: if it doesn’t work out, can you afford to lose your principle entirely? How much will that set you back by?
This is a good time for you (or your financial advisor) to asses if the worst possible outcome of the high-risk investment is going to be devastating, and on the other hand, if the best possible outcome is worth the risk it entails.
– Can you handle the pressure?
This might be a question best answered by people around you – family, a friend, a confidant, an advisor. Are you in a position to handle the mental pressure that is attached with high-risk investments? The edge-of-the-seat waiting period takes patience and preparedness. If you are going to lose too much sleep on it, then you might not be entirely ready to play for high stakes yet.
To some extent, this also stems from your willingness to take that risk. Even though you might generally be an opportunistic investor, it is not necessary that you’re always willing to take up an opportunity as and when it presents itself.
I always advise my clients that when it comes to investments, greed and haste are unlikely to get you too far. It’s easy to get influenced by success stories of when a friend or colleague doubled their investment in a few months’ time, but the fact is: Only the success stories make the rounds at cocktail parties. You don’t here about the crushing failures.
How you invest your money is personal and circumstantial. Crypto-currencies and foreign exchange might seem like ‘the thing’ to invest in, but educate yourself on whether or not they are the right options for you.
You have to and need to invest – I doubt you’ll find any wavering judgments on that part. Letting your money sit in a static bank account is only going to devalue it as time passes.
And with investment comes risk. You just need to figure out the right kinds of risk that you are ready to take.
