Many of my friends, seniors, classmates, and others started calling me when financial markets started falling. All of them have only one question? Which shares to buy? What is right to do? And many other questions. I answered them, but there I realized that We have few Financial advisors, and the one working may not have the proper knowledge about everything. I have to make my readers aware of the risks involved in investment during such a crisis. So I wrote a post Why should investors pay less interest to financial News? But the time here is not standard. CEO of Blackrock, one of the biggest mutual fund companies worldwide, which manages investments worth billions of dollars, accepts he never saw such a time in his career of 44 years. So who am I talking about it? I am no one. But I am a blogger, and I have tried to run behind the story for more than five years. In the process, what I learned is practical knowledge. I am talking based on that knowledge.
Investing is taking a risk and making a return. But When the risks are significant, like what we are facing today, we need to rationalize risk. The first thing to understand is what is the risk? Risk is not an equal loss. I mentioned it in my blog post Risk similar Loss: A myth. I also wrote Mutual Fund Investments are subject to market risk. About the risks related to Mutual funds.
Risk is everywhere. The lowest risk, near-zero, is two things that I understood. One is Index funds because the beta of such funds is equal to 1. Which is one part of the risk? Indices are a combination of various stock indices. Diversification also reduces risk. But still not entirely cancel it.
So the second near RISK-free financial asset is Government debt securities. The different government holds different risk profiles. The lowest risk is with the US government. So the Treasury yield of the US government is having the most typical trouble. But for taking nearly zero risks, you will get almost zero return.
INVESTING IS ALL ABOUT RATIONALISATION OF RISK. Taking the right risks and removing the right risks.
There are many ways of managing risk. But in my knowledge, understanding what you are doing reduced all your trouble. I know I can’t understand the steel business. I don’t understand the Sugar business. Some types of pharma businesses are unknown to me, so You can’t find any stocks related to the sugar industry, Steel, or Pharma companies. I never invested in such stores. On the other hand, I understood banks, Movies, telecom, and logistics, so I invested in them.
I don’t understand the Future and options. So many big investors understood it. I don’t. So I don’t touch it.
Another significant factor is that you can buy the stocks based on hot tips but can’t buy that person’s conviction. I know the strength of SBI. Many of them don’t. My way of thinking is different than the others. The ways to analyze the company are different for different people. I am not claiming that I have a right. I wouldn’t say I like technical analysis, but I need to accept that it works.
The next myth that I came to know is debt funds are risk-free. I don’t know where this came from, but I can tell you that there is risk attached to debt securities. They are different, and any credit policy of any central bank from any country or QE can destroy potential returns from debt funds. So the risk profile of the debt fund is different from an equity fund.
The Best thing I can tell my readers is that keep their financial goals in mind. Think long-term. Don’t act in panic. Asset allocation is more important than anything else.
