Tuesday, January 25 2022

Risk in general terms is the probability of occurrence of an event not expected or anticipated to happen. In the financial market context, the risk refers to the possibility of experiencing losses due to factors that affect the overall performance of the markets engaged.

While volatility refers to the ups and downs of the market or stocks, in technical terms, volatility means the extent to which the stock deviates from the expected average; the higher the deviation, the greater the volatility of the stock. In the investment world, most people use a statistical tool like Standard deviation as a representation to measure risk in portfolios.

Key aspect of risk management is to stick to the asset allocation plan based on an individual’s financial circumstances without bothering much about market volatility. Secondly, equity investments should be seen from a long-term basis for a reasonable, sustainable return. Thirdly, comparing the returns with others’ portfolio returns is not advisable as risks and time horizons tend to differ between investors. Lastly and most importantly, investors should consider financial products which one can understand and stomach associated risk and rewards.

Investments are primarily about probabilities, and since probabilities are mostly less than 100, one can always make a good decision and end up with bad outcomes. However, the reverse is also true, i.e., investors make bad decisions and still land with good outcomes. The former is ‘Risk,’ and the latter is ‘Luck.’ We see risk as mostly happening to us but, luck is mostly our ‘effort.’ Subsequently, we constantly adjust Return to Risk but never to luck.

Therefore, the most critical aspect of risk management is the understanding that risk occurs when we least expect it to happen.

Setting investment goals is as crucial as investing in markets; in either case, one cannot escape volatility. The positive side is that one can manage volatility by making goals according to the asset class and systematic approach. For short-term traders, volatility hits very hard, while volatility in equities tends to even out over time in the longer term. Therefore, a systematic or phased approach helps even out volatility.

What is the ideal level to enter a stock? In a volatile market, this question makes little sense because it is practically impossible to catch the tops & bottoms of the market on an ongoing basis. Conversely, if one adopts a phased approach to investing, the volatility can be better negated. A phased approach will offer the rupee cost averaging. This will, in turn, make one get the best price when buying. In the long run, this will enhance portfolio returns with a reduced average cost of buying. We feel this is an excellent passive method of handling volatility.

The author, Rajesh Cheruvu, is Chief Investment Officer at Validus Wealth. The views expressed are personal

(Edited by : Anshul)

First Published:  IST


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