One of life’s most unpleasant surprises is to discover that you have suffered a significant loss because you underestimated the risks involved. Similarly, it can be almost as disappointing to find you have not made the most of your opportunities because you over-estimated the risks involved. This is a very important aspect especially wherever investments are involved. Two Demons in Your Financial Life
It is well known that inflation and tax are the two ‘demons’ which are the biggest impediments to you meeting your financial goals in life. That is the reason why it does not make sense to put all your long-term investments in fixed interest instruments like the bank FDs/RDs, PPF/EPF/DSOPF, Senior Citizen Savings Scheme, Post Office Schemes and Insurance. While some of them do have tax benefits of various kinds, returns from none of them is generally able to beat the inflation, thus making sure that the net value (real ‘purchasing power’) of your money erodes the longer your money stays there.
So, You Take Risks with Your Money…
You invest in growth assets like real-estate, stocks and mutual funds, F&O / Derivatives and sometimes even get-rich-quick schemes of doubtful integrity to make your money grow so as to beat the inflation and taxation losses. However, all these are definitely not for everybody. We are all aware that when it comes to taking risks, we each have our own comfort zone. We also know that our friends, family members and colleagues often have different comfort zones from our own. The whole issue of financial risk is a difficult one. On one hand, low risk tolerance prevents many people from doing as well as they could financially. On the other hand, some of life’s most unpleasant financial surprises arise because people were exposed to a level of risk beyond their comfort zone, i.e. beyond their risk tolerance. So, while we tend to focus on the dangers of taking too much risk, it is possible to have too little risk, which results in missed opportunities.
How do I know what risk can I take?
Risk means different things to different people – danger, uncertainty, opportunity and even thrill. In reality, though, there is risk in any situation where there is more than one possible outcome and the outcomes have differing values for you. Studies have identified five different categories of risk: financial, physical, social, health and ethical. Most people behave consistently within a category but not necessarily between categories, e.g. a para-commando is more likely to be a mountain climber but may not be a comfortable public speaker or financial risk-taker.
Risk tolerance is the level of risk a person prefers to take. Unlike, say, height or weight, there is no unit of measurement for risk tolerance. A person’s risk tolerance can only be measured relative to others on a constructed scale, in much the same way as IQ is measured. Studies confirm that people generally do not accurately estimate their own risk tolerance. Majority of the population is, in absolute terms, more risk-avoiding than it is risk-seeking. Faced with a choice between a certain profit and an uncertain but probably larger profit, a sizeable majority chooses the certain (but probably smaller) profit.
As the above shows, it is very important to know how much risk you can take in financial decisions so as to decide on the most comfortable financial avenue where you should invest. There come many occasions in life when you know you need to take some risks but are not very sure whether any possible adversity due to this decision will be actually acceptable to you. We, at Hum Fauji Initiatives, bring you the world’s most comprehensive (and expensive!) tool to assess your risk tolerance which is free to you. While the result will give you a good idea about your risk tolerance, it should be properly interpreted by a financial expert to be of better value to you.
Please send your name and mail ID to us at contactus@humfauji.in or enter it at the link https://humfauji.in/contact-us to take this test of 25 questions which has been developed after decades of research and will take you just about 15 minutes to attempt.
Col (retd) Sanjeev Govila, CERTIFIED FINANCIAL PLANNERCM,
CEO, Hum Fauji InitiativesTM, Your Long-term Partner for Wealth Creation
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