Risk & Uncertainty
As Investors that invest our money we are well aware that our investments are exposed to both Risk & uncertainty. However for most people the two terms are used interchangeably and pretty much mean the same.
Let us examine if there is more to it ….
Risk is the probability of an event happening at a time or not. The probabilities are known in Risk. There is a 50 % chance that the month after you have invested your money in a Mutual fund, the stock market could go down. Similarly there is a 65 % chance that a person over the age of 70 years is a diabetic and hence is susceptible to grave health hazards.. both life & medical insurance businesses are built on these probabilities. There are enough statisticians to help us understand the probabilities of a particular risk happening one way or the other.
Uncertainty means the probabilities are unknown. No one could have in their wildest imagination predicted in 2017 that YES BANK a new generation bank with almost AAA ratings would face liquidation in 2020. No one could have predicted in 2015 that one of the biggest financial institutions in India IL&FS would collapse by the year 2018. There is no way to predict uncertainty.
How to deal with both Risk & Uncertainty relating to investments ?
Risks can be dealt with diversification ( eggs in many baskets ) and by countering it with investment products that work as a hedge ie when one investment goes down, another goes up.. as in the case of Gold going up when Equity goes down, in some circumstances.
Uncertainty needs to be dealt with in the mind. Take the example of the Covid Pandemic, best laid plans have been waylaid. The way to deal with uncertainty is to be aware that anything might happen anytime, also to avoid hasty judgements and allow time to think through about the best possible action. It is not easy, but with maturity you can come to handle uncertainty better.
One needs to understand that one cannot live in today's world much less invest in them, without the ability to handle Risk & Uncertainty.
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