Risk means different things to different people. Anything is risky if it affects your lifestyle and security – risk impacts each of us differently. Risk applies to more than investments.
Risk can mean permanent capital loss as caused by inflation or a speculation expiring worthless.
It can be goals and targets not being reached. For instance, if the main earner is no longer able to earn. What would the knock-on effect be? What contingencies are in place? Are they robust enough?
Risk can also be assets being frozen, over leveraged, credit risk, promoter and provider risk, fraud and opportunity cost. All things that may be impossible to recover from, things that mean you may have to start again from zero. In this regard the return of your capital is as important as the return on your capital.
How much investments go up and down is not risk, that’s volatility, and to be welcomed, volatility should always, on average, result in larger returns.
The risk of any particular investment is the same for all. But the risk to the investor is different for each of us.
Elroy Dimson describes risk as: “Risk means more things can happen than will happen.”
Seth Godin says: “We talk about risk like it’s a bad thing. But all forward motion involves risk. You can’t find a risk-free way to accomplish much of anything.”
When considering the risks we take on, we need to know that the odds of it working out are likely to be fully rewarded. We also need to be mindful of the consequences of being wrong – will it stop you being able to do something different next time?
There is downside in everything, anyone claiming otherwise (and they do) needs to be avoided. We want to choose intelligent actions where the downside is understood, and the upside is worth having.
There is a lot at stake, but that does not mean there needs to be a lot at risk. A lot of risk can be side stepped or mitigated using sensible, divergent strategies – mixing one approach with another.
What we need to get clear is where real risk exists for you – it is different for different people because each of us is after different, albeit it similar, things.
In many ways the biggest risk we face is ourselves. Humans are generally failed investors; they consistently make the wrong decisions at the wrong time.
It is our conversations, our different perspectives and your ability to hear and appreciate a contrary view that will reduce risk most.