Risk



Risk…the possibility that something bad will happen.

To my great chagrin the financial services industry, or at least those who are not prepared to do much thinking on the subject, have no clear concept of what is “risk” and what are its degrees.
If you walk across a railroad track there is a risk that the train will run over you and you will be dead. If you walk across a rail crossing and the train is coming in your direction at 80 kilometres an hour and you stay on the track in front of the train there is no “risk” that you will be killed, there is a “certainty”.

Risk then includes the possibility that something bad will happen which clearly includes some possibility that nothing bad will happen.

Early in my career as a financial planner Macquarie Bank published a handbook which set out to characterise types of risk relating to money and investments (note the difference). I have lost my little book so I’ll try to remember the types of risk they spelled out.

Market risk. The investment you make will go down in value.

Affordability risk. The investment you make will go down in value and you are forced to sell.

Embezzlement risk. The investment you have made involves giving money to a crook and he embezzles your money.

Currency risk. You are going to Europe next week and the euro rises against the dollar.

Pickpocket risk. You withdraw $500 from the ATM and a skilled pickpocket pinches it.

Sovereign risk. Your government completely loses the plot and the currency loses its purchasing power (Germany in the 30s, Greece, Zimbabwe).

Inflation risk. All prices go up; your income doesn’t.

Profitability risk. The business you own does not sell sufficient goods and/or products to make sufficient gross profit to cover all the expenses of the business.

Technology risk. The service you sell or the goods you sell become redundant through technology. Did anyone predict what happened to Kodak? Or Blockbuster Videos?

Redundancy risk. Your job simply ceases to exist eg typesetters.

I have tried hard and without success to find a dealing with money that is completely risk free.

Comments

Post a Comment

Popular posts from this blog

Business Structure

When setting up a new business one of the critical decisions that must be made relates to the structure of the business. The options are: ·         Sole Trader ·         Partnership ·         Joint Venture ·         Limited Partnership ·         Trust ·         Company Most people going into a new business or making changes to an existing activity that earns some money on the side (which is possibly just a hobby and therefore not taxable) will be frustrated by the answer from a professional to the question “Which structure is best for me?” The answer must be……”that depends”. Tax considerations are important, but depending on the type of the business, expected profitability and family circumstances, these considerations could easily be overwhelmed by other more important issues. The most recurring myth that I have had to reject repeatedly to dozens of clients over the last 30 years or so,is that establishment of a company means that you can cla
Read more

Divorce

I have been through a divorce. It was not fun. On a couple of occasions in the past I have assisted clients in the process of getting divorced to reduce the trauma but above all to attempt to produce a financial result that was “fair” (in whose mind?) and a separation that was practical. The first client I ever helped was the lady to whom I have now been married for 36 years. Because her husband at the time was a mate of mine (and, in a manner of speaking still is) the question occasionally arises that I could have got a much better deal for her. In my opinion a better deal is not just measured in dollars! When I graduated with an LLB after working as an accountant for almost 30 years, a solicitor who I approached for advice about what to do with this newly acquired qualification said that he could keep me going full-time providing financial advice to his divorcing clients - so that they could win in financial terms. I rejected that concept because I believed passiona
Read more

The Hard Working Australian

When I studied English at University one of the lasting imprints on my consciousness, put there by more than one of the lecturers, was the fact that our language, unlike Latin, continues to evolve. What a phrase, expression or even a word that was universally accepted as meaning something in 1948, can mean something quite different in 2018. The word “gay” springs to mind, as does the word “nice”. Nice once meant silly, foolish or simple, far from the complimentary meaning it has now. As a teenager I would have thought that the expression “hard working Australian” had a simple enough meaning. Somehow a particular band of politicians have managed to hijack these words to create an exclusive section of our country who are toiling away, being exploited, always struggling to make ends meet and deserving of more government assistance. This assistance is provided by the government from taxes collected. From whom? Surely not the hardworking Australians who are too busy working hard a
Read more