It’s been an extraordinary year where we all experienced a way of life, which till now, we’d have thought impossible. Yet it happened. One of the most glaring learnings from this time is that nothing is known and everything is unpredictable. Unpredictability leads to uncertainty and what that means is that risk is inherent in life.
This learning, unfortunately, comes with a sense of helplessness and being out of control. It also brings a sense of insecurity with the realization that we may have very little control over our own futures. Now what?
We can keep thinking on these lines and feel dismayed by our lives or we can focus on the things that we do control and try to be better prepared for random eventualities and risks in future. It also means that we need to incorporate a little bit of risk-taking in different aspects of our life, especially in our financial life.
If we are going to be better risk-takers, we must also indulge in being better prepared.
What is financial risk?
When we talk about risk in context to our physical health, we know that it relates to eating habits and getting some good exercise. For example, having only sweet for all our meals will put our health at risk. At the same time, we need a little bit of sweetness in our meals every now and then to entertain our taste buds. Similarly, overdoing a workout regimen can put our muscles at the risk of injury, but doing no exercise at all is also a risk.
Risk in financial matters means enduring a degree of uncertainty in the immediate time, in order to grow your wealth to last you many years into the future. If you choose your long-term securities carefully and invest in an asset like equity, this is a risk worth taking for growth. You can’t take this risk with all your money as it would limit your current lifestyle and needs; some has to be kept in financial securities which focus more on safety than on growth.
Visualise yourself as a risk-taker who is able to build a portfolio today that brings the ability to have regular income years later. This portfolio can seem challenging at first but as time goes, returns smoothen out.
Why do we need it?
Why take this risk and why not focus only on safety? Measured risk in investments helps us outbid inflation or price rise in the long run. This is very important if you want to build wealth in the long term which can give you security in times of uncertainty and also when income from your profession ceases.
Unless you add a bit of risk to your investment portfolio, you will not be able to generate the return you need to grow your pool of wealth. Inflation eats into the value of your money. To beat inflation you have to take some risk. Don’t make it a 100% part of your portfolio rather balance it out with stable return and safe investments. The latter will help you cushion immediate uncertainties, while the measured risk through growth assets like equity will help you cushion future uncertainties.
Not taking some risk is the biggest risk.
Risk can be scary till you overcome that threshold where you have accumulated enough return and that can take upwards of 5 years. Taking risk is a necessity to grow your money, but it requires a lot of your patience too.
Star small and get comfortable
If you have never invested in anything other than fixed deposits and are uncomfortable with the immediate uncertainty of risk-bearing investments, then start small. Thanks to financial securities like mutual funds, you can invest as little as Rs 500 a month in equity. Equity as an asset helps you earn inflation plus returns if left invested for the long term. Build your experience by starting small and seeing the advantage of regular investments in assets like equity. Once you get comfortable, start allocating more.
Take as much risk as you are comfortable absorbing in the short term, in other words, the money you invest in risk assets like equity is money you won’t need for at least 7-10 years.
Make risk your friend, especially since we now know that things can change at any moment and we don’t control the external environment, all you can do is be better prepared, mentally, physically and financially. Take the right risks and be prepared.