Understanding life is difficult. You always crazily chase pleasure but you often get pain. Balance and control is necessary in life, same applies to investment. There are gains, there are losses. Each time you give out money for investment, emtional clutches hold your nerves.
Person A is stable with losses or mood swing of investment, while Person B perhaps cannot handle hardship. Each person thinks and reacts differently.
Risk simply means negative possibility, or how big chance you get the wrong results. Still, risk is subjective, its meaning depends on each perception, that varies from person to person. Even professionals interpret risk according to their trade. You, as investors, look at risk as a chance of loss or gain in investment. Nevertheless, you, your friends, each person’s willingness to take loss, varies.
AGE
As persons grow older, they tend to take less risk.
GENDER
Women tend to avoid risk compared to male.
BIRTH SEQUENCE
Eldest children in Asian family tend to be risk averse, while younger children can afford to do anything because they avoid responsibility.
MARITAL STATUS
Married persons are risk averse compared to single persons. However, this is not very true. For example, if the husband is employed and has high income, the wife can job-hop, gamble, and take more risks. It was also found that dual income couples can afford to go for more investment risk, because both of them have source of income.
STABLE JOB
Those who work in private companies and self-employed, are natural in risk taking , than goovernment servants and teachers which are safe and secured. Those who work in small businesses are more risk tolerant than those who sit in big companies.
EDUCATION
Those who have experience and knowledge in investment field, can take more risk than those who are lacks the knowledge. However, in business field, less educated tend to go for more risk than highly educated counterparts. Many top businessmen are not well educated, yet they are seen to be risk taker in managing their businesses. This probably due to fact that less educated are forced to take much more risk by venturing into business, as they are not able to get well-paying job.
WEALTH
Rich people can afford to loose money because even they loose big money, they can still live comfortably and throw more money to take losses.
Each investment vehicle has different degree of risk. For instance, investment, if it is ranked from safest to riskiest is as below :
- Saving account / current account / fixed deposit (safest)
- Money market like treasure bills, commercial paper, bankers acceptance, bills of exchange (although the return rate fluctuates based on Inter Bank Offer Rate, the money you pay to buy these are guaranteed)
- At higher risk than above, you can invest in debenture and assets backed securities, the return is a bit higher, but less liquid.
- Defensive and blue chip shares. They are a lot risky than above, but usually you can get higher dividend, although not certain.
- Listed but smaller and less reputable shares. These are riskier than blue chip.
- Speculating in shares by buying, selling, and short-selling shares. Usually, such active trading is much riskier than buying shares and waiting for dividend.
- Speculating in shares derivatives. Derivatives are options, forward contract, interest rate swap. Derivatives are complicated and perceived at totally level of risk.
- Trading currencies are a lot riskier than any of above. Not only it is complicated but also too unpredictable.
- If trading currencies itself is very risky, speculating currencies derivatives is even more riskier.
There are also many investment and business ventures nowadays that are promoted to public, all of them are fusion of scam and normal business models, which are promoted under “Easy Money Scheme” and “Huge investment return”. Although many of them are genuine but usually are misleading and exaggerated. The promoters also are often know little about the scheme they sell.
These investment products, such business schemes, how are we going to assess their risk. Unproven and unaudited, obviously the risk should very very high. Risky investment and businesses are not the problem. Risky investment is just one of many options investors can choose from.
The proper idea is ones who can take big risk, can throw money into risky schemes. On the other hand, average people who cannot take losses shouldn’t try such ventures.
However, are that happening ? No. From what we see, average salaried individual throw all of their saving or borrow more than their earning ability, just to simply give in to the very risky ventures. These mediocres are actually risk averse, who are scared of losses, who don’t suit risky ventures. But, why these weak and spineless individuals risk their life.
To know your risk profile, you should look at your investment objectives. Huge return comes with high risk. Low return comes with low risk. The problem is, these average salaried individuals think that the risky ventures, give huge return and guaranteed to be safe. Thus, when they actually suffer huge losses, they are totally unprepared.
Why they rush to premature decision ? Because their mind is clouded and drugged with money and shining life. For example, when average persons are persuaded to give their time and money to Multi level Marketing, why the things shown only are luxurious cars and big houses ? Businesses should only be associated to hardship, tedious process, tenacity, and huge investment. Instead, these mediocres are misled by glamorious lifestyle. They ae hallucinating and not thinking thoroughly. Finally, they rush to risky decisions even they actually cannot take it.
Another thing is Expectation Gap. Like in the case of Amanah Saham Bumiputera, Tabung Haji, and Employee Provident Fund, everyone, the laymen, the public, expect and pressure for for high return, although these 3 investment vehhicles are not supposed to give high return. Huge expectation against low return reality, create what we call as Expectation Gap.
Consequently, the fund managers are forced to give in, and start to use money for risky investment. The fund managers usually reveal to investors that the money is put into riskier investment, but investors refuse to understand. This creates the 2nd stage of Expectation Gap. The investors, who choose to be indifferent, then are happy they are receiving decent return, although their money is continously at risk. They continue to be happy, invest more, and expect more. This causes very deep Expectation Gap.
When financial crisis arrives or economy is overheating and reaches stagflation, the risk materializes. They suffer losses and can’t believe it, then start blaming everbody. This was what happened in 1997 Financial Crisis, investors lose all their money when state owned unit trusts went down. These average laymen believed since the investment is handled by government, they will be secured. But actually, unit trusts including ASB possess certain level of risk, and law cannot do anything to save them.
The same goes in United State, when investors have the habit to perceive risky investment as normal, they suffered greatly when sub prime martgage crisis hit. Life insurance companies and fixed income mutual fund that were supposed to safeguard investors /savers’ money were put in risky mezzanine and complicated loan packaging. Investors didn’t care as long they get good return, but when they loose greatly (which was bound to happen anyway because of high risk), they whine.
These are all expectation Gap.
Filed under: Financial Planning, Investment Image may be NSFW.
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