Today, we live in a world advancing in technology every day. In the near future, we may even live on the Moon or Mars. Technology has made life easier but also introduced new complexities—what we can call “complicated simplicity.” These complicated simplicities also bring various risks in our daily life. Everyday activities like driving a car, transferring money through apps, answering a call, or clicking on a random link received on an Email/SMS can sometimes lead to unexpected and serious consequences.
Understanding Risk and Its Outcomes
These complexities trigger me to think about the risks we have been exposed to and how we perceive risk. We swing along some and avoid a few others. We take the risk of zooming on the highway, and also, educate ourselves to avoid clicking on any suspicious emails.
When I look at the outcomes of risks taken by different people, I notice two extremes.
On one side, there are inspiring success stories, like the transformation from 4G to 5G and the rise of Jio, which made communication affordable for millions. These were bold risks taken by entrepreneurs that created immense value for society.
On the other hand, there are cases of people like Subrata Roy, the founder of Sahara India Pariwar, whose ambitious business led to long-lasting damage to society and suffering for many. More recently, we have seen many examples of risks backfiring, causing huge financial losses, suffering, and damaging reputations.
Learning from Others’ Mistakes
They say the cheapest and best lesson is learning from others’ mistakes. So, what can we learn from these stories of wins and losses? Elon Musk once said, “If something is important enough, even if the odds are against you, you should still do it.” This quote emphasizes the fact that risk and reward are always go hand in hand.
The Importance of Calculated Risks
Taking calculated risks with clear goals is worth it, but taking risks without preparation or purpose often leads to loss and stress.
During the pandemic, many of us learnt to save money instead of spending recklessly. When the markets were down, we turned to invest in the stock market. Though we see that most of such investments have yielded well, not all investments have given good results. The financial influencers and trading apps often paint a rosy picture of making easy quick money through day trading or futures and options. However, investing without proper research or understanding the businesses and the underlying assets, or not analysing the technicals can be a reckless risk driven by greed.
Setting Clear Financial Goals
This is where financial goals become crucial. Clear financial goals, like buying a home, funding education, or investing for retirement, provide direction and purpose to our investments. Goals act as a roadmap, guiding our decisions and setting boundaries for the risks we should take to achieve the goals with the highest probability. This is critical not only to get the best from our finances but also to bring out the best in us.
Selecting the Right Investment Products
Selecting the right investment product ensures highest probability of achieving the goals. For example, investing in equity mutual funds for the short term with the expectation of high returns is often an uncalculated risk. Remember, the risk in equity investments lies in losing our capital amount, especially when investments are made for the short term. Hence. the key is to align the financial product with our goals and the time available to achieve those goals. It’s important to follow a simple rule while selecting an investment product:
– For Short-Term Goals (up to 3 years): Prioritise capital safety by choosing low risk – low return products
– For Medium-Term Goals (3 – 5 years): Moderate risk – moderate return products are well suited
– For Long-Term Goals (above 5 – 6 years): Investing in high risk – high return products is more efficient and suitable
Balancing Risk and Goals
Risk and goals are like happy siblings that complement each other when balanced correctly. They go hand in hand. Quantifying the risk helps us decide the amount of risk we can take to achieve a particular goal. Calculated risks help to achieve those goals faster without compromising our financial security.
The key is not to avoid risks but to embrace them wisely, letting our goals guide us. A prudent investor accepts market volatility risk only when it complements their clearly defined goals. By understanding and quantifying these risks, they ensure peace of mind and avoid sleepless nights.
Shreedhara is the Founder & Director of Ara Financial Services Pvt. Ltd. He has an experience of over 2 decades in Financial Service Industry with majority of it in guiding individuals and institutions on their investments requirements.
