Thursday, October 9, 2008

Personal Finance RISK - another Myth

A very common comment in Personal Finance is this ...

The Higher the Return,
The Higher the Risk !!

I agree with this if I am a general public.  I also like it if I am discussing this in a philosophical class.  But in practical life in Personal Finance, it doesn't help much.  It just tell me not to be greedy.  But it doesn't tell me what to do with my portfolio.  So the myth buster is as below ...
Generally higher return comes with higher risk,
For Those Who Don't Know ANYTHING !!
If you know exactly what you are getting into, has prepared for the worst and expecting the best from it, so ideally there is no risk at all.

For example,

standing expose in high place is dangerous,
especially if you are not used to it.

But high rise workers do that everyday,
they know very well what to do,
and what not to do.

They check all the safety cables,
before going up,
and look for secondary fall place,
before making the next step,
just in case they fall,
they have had enough compensation,
for their own or their loved ones.

Day in day out, they are used to it,
and they are not over confidence,

Its very risky for you,
Its not that risky for them.

Some may claims that the risk is the same to all, just that one has mitigated the risk and another not.  Well, again in practical, if you have already mitigated the risk, the risk is gone and there is no risk anymore - ideally.

Back into the high rise example, if you are an office worker and you think high rise is risky.  So you decided not to go to high rise building.  That is also one way to mitigate risk and there will be NO RISK AT ALL if you never go that place.

So the fundamental about risk is,

The more you learn and know about it,
the less risk it is to you personally !

So yes generally higher return higher risk but you are not a general public, you just need to know what you have to do for youself so that you can achieve higher return without the same high risk in your portfolio.  Thats why its called "Personal" Finance and not General Public Finance :)