There is no such thing as “Risk-Free”

People are afraid, very afraid. The most recent carnage in the stock-market notwithstanding, CNX 100 is back to where it was in September 2010, a very volatile 30 months.

CNX 100: March 2010 - 2013

The conversations I have been having recently typically ends with “I don’t want to take any risk right now, let me wait and watch.” And therein lies the rub – there is no such thing as “risk-free.” Not in life, not in investing. The total risk in this world is a constant – we only transform it by our action or in-action. So let me walk you through what I mean.

“I don’t want to invest in the stock-market right now.”

The most dangerous part of the statement is “right now.” It means that either you, or an Oracle sitting somewhere, can correctly predict the right time to enter and exit the market. Some people have spent their entire lives (and countless computer cycles) to divine market-timing. Ever heard of the Elliott wave principle? Its a beautifully complicated mathematician’s wet-dream come true. Read the Wikipedia article first and then read this Quora thread. Forget market-timing, your odds of dating Deepika Padukone is better.

“I don’t want to invest in stocks.”

I totally agree with you if you are older than 70 years. You have no business investing in stocks or bonds for that matter. Hopefully you have made the right financial decisions so far – focus on spending all that hard earned money on pampering your grand-kids and what not. For the rest of you: bonds, especially in a country like ours, is a bad idea. This is how the benchmark yield curve looks like:

Yield curve

You are basically lending at about 7.5% for 10 years while the historical annual inflation rate is 10%. So essentially you are paying the government 2.5% for the privilege of taking your money. Want to take a walk down the credit-curve? There are NCDs that pay 12% you say? After all, aren’t they called “company fixed deposits?” You should really direct these questions to the holders of Deccan Chronicle, HDIL and Hubtown NCDs (these are the most recent examples of NCDs under default). So NCDs are not all that “risk-free” are they? Remember: the rate differential is meant to compensate you for the risk that you are taking. See how risk got transformed from inflation-risk to credit-risk?

“Can you guarantee that I will not lose money?”

Will anybody write you insurance without a premium? Of course there are ways in which principal can be protected, but that protection will come at a cost. For example, Birla Sun Life has a ULIP that guarantees that you will always buy low and sell high – after taking 10% in fees, every year.

“I will only invest in gold”

The most important thing before “investing” in gold is to know that the price of gold is governed only by the laws of supply and demand, like any other commodity. Sure, the last few years have been kind to the yellow metal – mostly driven by the “fear trade.” But the world is still turning and the sky has not fallen on our heads. Gold is already a major part of assets on Indian household balance-sheets, why double-down especially when the macro thesis is no longer valid?

“I will not invest in anything”

Yup, there was a time, back in 2008, when some nut-jobs withdrew all their money from the bank and kept it under their mattresses. But we are in 2013 now. Inflation has clocked over 10% year-over-year-over-year. Not doing anything is costing you money.

So what should you do? First, understand that there is no such thing as “risk-free.” As long as you are breathing, you will be taking risks – either actively or passively. Knowing what kind of risk you are willing to take is the first step towards coming up with an investment strategy. Once you have an investment strategy in place, draw up a risk-management strategy and stick to it.

And, most importantly, have a look at some of our investment themes – we can help you craft your investment and risk-management strategy. Give us a call!

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