Friday, October 10, 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 :)


** OUT OF TRACK 思 想 出 軌 ** said...

Great photo to match the passage! Good post!

I wonder if managing high risk of investment is same philosophy in managing love relationship too :P
Is there a higher possibility to get high return of love when I am investing and managing high risk of love? i doubt...

Sorry teacher ... out of topic ya...

** OUT OF TRACK 思 想 出 軌 ** said...

back to the topic, the high risk to the worker is still exist, but they are comfortable with it whereas we dont. so?

Michael Tsen said...

they are comfortable because to them, there is no risk. :)

investment in love is not the same but may b similar actually, u need to use the (1)right tool the (2)smart way and then finally be very (3) hardworking on it, then the return will come.

but most of the time lovers are very hardworking but never use any 'tool' and not so smart about it ... :p

** OUT OF TRACK 思 想 出 軌 ** said...

why no risk to them? it is just that they are used to it and confident without needing to worry about it, but i dont think there is no risk - even there is risk on the same path we walk from home to school everyday in our life.

right tool+smart way+hardworking=love? It is an interesting formula from men that i've heard of...

Michael Tsen said...

the post already answer that, if you mitigate the risk, there is no risk anymore. if you "get used to it", then you may be "ignoring" it, then yes, the risk is still there. that is why from surface it may look the same, but may bring very different end result.

** OUT OF TRACK 思 想 出 軌 ** said...

i agree and get your idea about 'no risk' but as a 'writer' i do not agree to use this word :) Anyone, layman or not, will not agree there is 'no risk' - but your point of view, i second this post.

ChampDog said...

Yes I agree. Risk to everyone is different and it depends on the knowledge that we know. It also depends on where you stand to look at the risk. Good post!