A detergent company came up with the commercial where a small boy soils his shirt to help his grandmother pick a fallen ten-rupee note; and a similar one where he goes on to help a neighbour with food and spoils his clothes. The advertisement tagline said “Daag Acche Hain”.
Similarly, some degree of investment risk in a portfolio is good “Investment risk acche hain”. Unfortunately, many investors burn their hands, only to narrate their horror stories of their wounds. These stories numb many new prospective investors and forces them to stay at bay.
How does “Investment risk acche hain” becomes “Investment risk ache hain”?
Using few important anecdotes to understand and clarify the perception of risk.
1. Roller Coaster vs. Merry Go-Round: Majority of parents with young children when asked this question preferred Merry-go-round to roller coaster.
2. Hand-gun vs. Cigarette: A man walking with a hand-gun will be perceived to be more dangerous than someone walking with a cigarette.
3. AIDS vs. Malaria: AIDS is more dangerous than Malaria.
Data suggests that there are more accidents on Merry-go-round than on Roller-Coaster; there are more tobacco related deaths than by hand-guns and Malaria kills more people than AIDS.
For example, if a person died while Bungee Jumping. It will be a big news with good media coverage. The bloody & damaged body image of the dead person, the description of his harness snapped, etc. will leave a lasting impression on the minds of all the people either reading or watching the news. This may be a rare chance occurrence say 1 out of 100,000 events but our minds will carry this perception because we did not get to know all those 99,999 events where people had a perfect Bungee Jumping experience.
Behaviourally, our brains tend to pay too much attention to a rare event than the most likely occurrences. Most often our perception of risk is ill-informed.
Similarly, most people see investing as a big risk , but the real risk is when the post-tax returns fails to beat the average inflation – the inflation risk. Inflation is like the termite under
your wood-work that may not be visible from outside but eats away the value of your hard-earned money.
Inflation is today’s time is not just about the government printed number but it must also factor our lifestyle inflation – for example upgrading to a new expensive phone or a new car.
Investment is no longer a choice but a necessity.
“A Ship in a harbour is safe,
But that is not what ships are built for”.
This concludes that Investment risk the oxygen to the portfolio, it is much required for the growth of the portfolio. The same oxygen is also required for burning. If not used appropriately then it can burn your hands /investments.
Follow my next article on understanding invest risks of different asset classes and how to mitigate them.