Take a step to Risk (Risk and Safety Margin)
For many people, Risk refers to like eating a ‘Rusk’. But, it is not a eatable item. Then, how many
of us are like to take the ‘Risk’ ?
Risk – Exposure to Danger or Hazard
In Financial(Investment) terms, Risk is a deviation between
the actual and the expected returns.
Risk has two faces, as it have Positive and Negative.
Without any risk, the investment of money can gives the
return of ‘Null’ or a little bit like positive. If we dare to act, then we get
better Profits (Positive) and Losses(Negative) in many cases J This is the case for so many of us, not
willing to take risk or take risk without aware.
Is it good, for not taking Risk ?
Is really, Risk less investments are protecting our wealth
/Future Daily expenses ?
Absolutely not !
Then, how we at Risk ?
- ·
Getting down in the river without knowing how to
swim or Not aware about the depth of the river even Swimming.
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Riding rude in National Highways or not knowing
how to tackle the opposite Road Vehicles even following Road Rules.
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Taking Risks at Play ground, School Days, Love,
in your office, Smoking, Using Alcohol – Like we are taking risk regularly.
We still take risk, but we forget the effect of risk J
What is the Effect of Investment Risk ?
On Investing terms, we mostly willing to protect our Capital
and so we looking for the Safe Investments like Bank Deposits, Postal Savings,
Government Bonds(Gilt) /Securities(G-Secs). But we have to understand, we just
getting the Low return on our investments because of these Safe Investments.
Are you think these Safe Investments are protecting your
wealth ?
Not at all, even it sucks your future expenses and dreams.
Because of the effect of investment risk.
Risk Types:
·
- Inflation Risk
- Liquidity Risk
- Business Risk
- Interest Rate Risk
- Market Risk
Inflation Risk:
We Can’t avoid these type of Risk (Inflation). A general
increase in prices and falling in the purchase value of money. So, we lose the Purchasing power due to
inflation. Today’s value of Rs. 100/-
will not be the same for next year and
if the Inflation goes 8 % then the value of Rs. 100/- today will be the Rs.
92/- for the next year. Herenow, if you
have the low return on your investments, even safe deposits but you lose the
purchasing value. Your dreams lose too.
Liquidity Risk:
We could have anyone of assets like Physical or Financial
Assets. Physical Assets refer such as Real Estate, Gold, Factory and the
Financial Assets like Bank Deposits, Bonds, Stocks,etc. Every assets have a
different criteria for the Return on Investments. But the liquidity is the
matter in force, when we need in to cash. We cannot always redeem immediate
cash on our Real Estate Property and Some Deposits have a maturity period to
encash. Here now, we need the liquidity for our immediate expenses.
Business Risk:
Risk in the Operations of a company or a sector. So, it is
known as operating risk. This risk is caused by some factors that affect the
business of a company, like Raw material Cost, Labour Costs, Sales and
Distribution costs, Marketing strategy with the Competitive products or
companies. So, Holding a diversification on our portfolio, we can protect our
business risk.
Interest Rate Risk:
Interest Rate risk refers to the risk that the bond prices
will fall in response to rising interest rates and vice-versa.
The relationship between the rates and bond prices look
like:
If the interest rates fall then bond prices will go up, if
interest rate rise then the bond prices will go down.
Market Risk:
The risk of the loss of value in an investment due to the
price movements in the market. What we
have already seen like, if the interest rates rise, then the value of existing
bonds will fall. Similiarly, an appreciation in the currency reduces the
earnings for the Export based business and leads to a currency risk. Market risk affects the investments where the
transactions happen at current prices such as Equity,bonds, gold, Real
Estate,etc. Small savings schemes have no market risk, but they do not gain in
value.
(Source: gametheoryacademy.org)
Risk Tolerance:
Risk Tolerance tells about our Risk Capacity and the
attitude of risk.
Risk Capacity refers the ability to take risk and the Risk
Attitude is the willingness to take risk. So, we can plan accordingly with this
Risk Tolerance.
Margin of Safety:
Margin of Safety is the difference between the intrinsic
value and it market price. In other
words, the difference between actual sales and break even sales.
The Margin of safety is also protect our investment from the
unknown risk.
Like protecting,
- ·
Insurance against any loss
- ·
Enough cash to survive or Save extra cash for the surprise expenses
- ·
Prevention is better than cure.
So, Take risk a Boss !
Risk comes from not
knowing what you are doing – Warren Buffet
