Thursday, March 24, 2011

Prince Of Risk

"Only those who risk going too far can possibly find out how far they can go."

People are willing to take a chance in order to get what they want out of life.
But even among those who have taken the plunge, there are varying degrees of tolerance for risk. Some are happy to fly by the seat of their pants. Others are extremely conservative. Both of these extremes can get us in trouble.

Those who blindly take risks are much like compulsive gamblers who spend all their time and money in a casino. They might strike it lucky on occasion, but more often than not, they lose big. And what they gain when they get lucky isn't enough to offset their massive losses.

Ultra-conservative types tend to fare even worse. They shy away from anything that entails the slightest bit of risk, hoping to hold onto what they have. While they rarely experience any losses, they have no chance of making significant gains.

Fortunately, most of us fall somewhere between these two extremes. Smart people know how to analyze risks and steer clear of those that are unlikely to work out in their favor, yet they realize that some risk is essential if they want to get ahead.

But the successful investor does not take risks like that. He carefully considers the risk versus the potential benefit. He weighs the probability of things turning out favorably versus disaster. He makes an educated guess at how it will work out, evaluates the consequences he will face if it doesn't, and he bases his decision on that. In other words, he looks before he leaps.

One of the keys to determining which risks to take knows what you can realistically afford to lose. This is something that those with an intense fear of risk have trouble with. They either believe that they cannot afford to lose anything, or they convince themselves that they stand to lose a lot more than they really do. The intelligent risk taker, on the other hand, takes the time to assess how much time, money and energy he can reasonably part with. If the amount risked is less than that, and the reward is worthwhile, he moves forward.

A risk wouldn't be a risk without the chance of failure. But if there's also a reasonable chance of success, it is worth considering.

Overcoming Your Fear of Risk:
Starting small is a good way to chip away at your fears. Maybe you could take a small risk that doesn't put money you already have at stake .These changes could result in higher, lower or unchanged profits. But as long as you monitor your results closely and reverse the changes if profits decrease significantly, there's no way you can lose much.

Keep taking these small risks until you've achieved some success. Then move on to progressively larger ones. This will boost your confidence in your decisions and show you that taking risks can work out to your advantage.

Putting the things we've worked hard for on the line is a scary proposition. But if you want to keep building on what you've got, a certain amount of risk is necessary. Not every investment will work out in your favor. But if you make educated decisions, your successes will outweigh your failures.

Always yours

Atul Sikrai 

Sr Vice President  & Head Equities.

wiTdom investment advisory.


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