The Game of Risk
The word risk conjures up images that spell disaster or loss; something like an accident or natural disaster that leaves a trail of destruction on its path.
Now after reading "investments are subject to market risk" who in his right frame of mind will ever step into the market?????
Words bring pictures into our minds and hence it is important to see "words" before using them.A better and pertinent word to describe market behavior is "volatility" and we refer to market volatility all the time in investment markets.The word "volatility" does not cast as scary a shadow as the word "risk". The word "volatility" to finance professionals indicates uncertainty over the near term which could be from a few months up to one, two or even three years at times.
However, for a growing and young economy with strong fundamentals like political stability, good governance, independent and robust institutions like the Supreme Court, the Election Commission, the Reserve Bank of India, and etc. one can certainly expect a decent GDP growth over the next decade.
All the uncertainty thus pertains to the short term when markets are held hostage by sentiments rather than economic fundamentals. In the long term the markets simply reflect the economy.
So where is the risk then?
Had the word "risk" been replaced by the word "volatility" as in "investments are subject to market volatility", a lot of fear of the investors would have vanished into thin air.
By subjecting investors to unfounded fear we are driving them out of a 12% to 14% potential asset (equities) to a 6% to 8% investment (bank deposits) which seems risk free. Think again about the demon – INFLATION, which reduces the value of your money (purchasing power) over the time period.
However, one needs to observe that at 6% Rs. 1 lakh becomes about Rs. 3 lakhs in 20 years whereas at 12% Rs. 1 lakh becomes approximately Rs. 10 lakhs in 20 years which is more than 3 times more than the most popular traditional financial instrument. Now who is at risk after 20 years when physical strength and stamina are fading away and support of the investment corpus is most needed. This to me is "risk" when one has to spend 25 years of one's life with 1/3 rd of the amount that could so easily have generated.
The biggest risk of our lives is not getting educated in personal finance. Let's learn to understand risk.
Do we ask the air hostess for any guarantee of safe landing and arrival. On the contrary she exposes us to possible risks by talking us through the seat belts, oxygen masks, life jacket etc. Do we stop flying because of this?
A cricketer Phil Hughes dies after being hit by a slow bouncer despite wearing a helmet and being taken to the hospital in an ambulance.
It happens because "Life is risk". Nothing more or nothing less as far as markets are concerned.