Taking the Right Risk
Disclaimer: Please note that all content and information in this blog are for educational and informational purposes only and should not be taken as professional investment advice.
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Taking risk important to achieve returns. But taking risk alone isn't sufficient for returns. One needs the right risk to achieve returns.
Simply blindly accepting more risk does not mean you will have higher returns. You have to ensure the risk works in your favour.
The risk must be well-managed and most importantly, be commensurated with returns. Risk without returns is useless. No one will take risk without returns.
Yet, people still make risky decisions which don't pay-off.
Making decisions rashly based on emotions is a cause. Another which is confusing between foreseen risk and unforeseen risk.
People invest in assets they believe is worth the risk. And when they make poor investment decisions, they believe it is due to their foreseen risk materialising.
This is not always true. Many times the poor investment decisions we make stem not from our foreseen risk materialising but from unforeseen risks.
Risks which they neither knew nor foresaw. And the truth is that few will acknowledge it because people don't like being wrong, more so being wrong because of something unforeseen.
People don't like to be reminded of their blindspots, or worse still, mistakes. So they rationalise their poor investment decision to their foreseen risk materialising.
The fact is, no one will know the true cause of their poor investment decision but there are tell-tale signs. If the decision was made rashly, chances are, the decision was a poor one, with a good chance that there were many unforeseen risks.
Or specifically, unconsidered risks. The risks were unforeseen as they were not considered — whether due to a lack of competence or commitment.
One needs to be both able and willing to put in the effort in ensuring that one considers all reasonably possible risks in each decision made.
You don't need to consider remote risks to make a good investment decision. You just need to consider the most probable and most impactful ones.
Any risk that is probable or high impact can lead to disastrous consequences.
Poor investment decisions stem not from being "unlucky" but from a lack of calculated risk.
You make a poor investment decision when you either:
1. Take too much risk
2. Take too little risk
By little, it means insufficient — insufficient risk for what you are able to tolerate given your risk-aversion level. You dislike risk but you don't dislike it to the extent you believe you dislike it. In other words, you aren't taking enough risk for your risk profile.
There's nothing wrong with being risk-averse but there's something wrong if you aren't taking the appropriate level of risk which you can tolerate. Aim for an ideal level of risk where your investment utility is maximised.
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Disclaimer:
The content and information provided on this blog is solely for educational and informational purposes, and should not be construed as financial advice. The accuracy or completeness of the content and information provided in the blog cannot be guaranteed. Before making any investment decisions, it is important for readers to research and carry out independent verification of the information provided, or consult with a qualified financial professional. No warranty and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of actions taken based on the ideas or information found in this blog.
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