The different faces of risk

Roné Swanepoel, Business Development Manager at Morningstar Investment Management SA

Guiding our perception of risk is crucial to achieving our financial goals

Like a pen and paper, soap and water and salt and pepper, so too risk (and reward) goes with all investments. Carl Richards points out in his blog1 - “Risk is what’s left over after you think you’ve thought of everything”. He goes on to explain that investors are good at managing and dealing with risk by looking backwards and preparing themselves to deal with a situation they have already seen, only better this time. But we’re not good at preparing for something we can’t imagine.

If we could count on riskier investments to produce higher returns, would that not mean that it would not be risky in the first place?

Consider this example: If you buy something for R10 and sell it a year later at R20. Was it risky or not? Some might argue that the profit you made proves it was safe, while the academics would say it was clearly risky since the only way to make a lot of money (100% in this case) is to take a lot of risks. Both sides of the coin could be true – it could either have been a very safe investment that was sure to double or a very risky lottery bet.

We all have to deal with the fact that we just don’t know how the future will play out, especially when it comes to financial markets. All investments have risk but these risks come in many shapes and forms, and guiding our perception of risk when it comes to investing is crucial to achieving our financial goals.

Click here to read more...