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Risk: Just another four letter word
Published on Mon, Sep 04, 2006 at 21:15 in Money » Tax section
Tags: Risk, Investment
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Most of the people relish colas and I have seen people giving their two-three year olds these Thande ka Tadka or Yeh Dil Mange More drinks. Now there is an ongoing debate in the industry on the safety of colas.
This has been after the Centre of Science and Environment released its report on the high pesticide levels in these drinks. Some of the states have banned colas; some are yet to take any action and so on.
I read comments from industry folks that the government should prescribe guidelines for pesticide levels.
The question is why drink something, which has pesticide in it at all? Isn’t it like we are paying to feed our children with pesticides, however small the quantity may be? By merely saying that other items also contain pesticides does not, in any manner, make Colas safe...
No, I am not doing a cola bashing here, though I would love to, the point that I am trying to get across is how skewed is our thought process on risk. Most of the people have taken far more risk in their life than they would like to believe. Knowingly or unknowingly, we tend to take far many financial and non-financial risks in life.
This brings me to my key point that ‘risk comes from not knowing what you are doing’. This was quoted by the legendary Warren Buffet. The brilliance of this statement is that it is applicable to just about anything you do in life. The objective of this article is to give investors a framework on understanding risk and its application, in making prudent economic decisions.
I hear a lot of people saying that we are conservative and we do not like to take a risk, when it comes to equity investments. This conservatism is evident from the huge amounts put away every year in fixed deposits, post office schemes, and bonds. Some industry figures quote that 1.8 per cent of the Indian population has invested in equity.
There are various perceptions that we hold about several things and part of it has to do with our background, experience, and education, but for most of the people it's just hearsay.
There is no risk-free investment. It’s just that different types of investments are exposed to different types of risk. For instance, sovereign debt is one that is guaranteed by the government (RBI Bonds, Post Office Schemes, Public Provident Fund (PPF), Senior Citizens Scheme etc.), and fixed deposits (FDs) might make people believe that their capital is safe.
But these instruments are exposed to several risks, the biggest of them being inflation risk (also known as purchasing power risk), reinvestment risk, interest rate risk. Besides this, the risk of lost opportunity, the risk of not achieving your financial goals, the risk of outliving your money and so on.
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