Risk

basilio said:

The topic of risk becomes murkier and murkier in my view. In my view I believe that much of our current economic and political system pointedly refuses to acknowledge quite clear risks because the consequences of having to face and deal with them are just too confronting. And that happens on a personal level as well.

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Agree, basilio. The so called moral hazard of socialising debt and privatising profits has probably reduced the willingness of the average person to take full responsibility for their own situation.

tech/a said:

Bill
Through life you never considered creating passive income?

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Yes, I got it now. Correct me if I am wrong but I thought passive income was income that required you to do nothing. By that I mean, own shares and get income without having to look at the screens all day. Or have an investment property that is owned outright. One that has a managing agent who takes care of it and direct deposits the rent into your account each Month. I have this right now already.

How do you cope with the erosion of inflation.
In 10 --- 15 yrs time the average wage will no longer be $71,000
More $120,000

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Good question. When the GFC hit I took a hit, capital wise and dividend wise, for me it was slightly more of a hit than what I expected. In other words I dropped income and capital value. Before I go any further I must say I am not a trader, I don't know anything about it, I am a long term shares and dividend investor.

Since the GFC things have come up a bit and so have my dividends. Where I win is that I have little expenses, I simply save more of my income from investments than what I spend. Because of that I put more into shares, super and fixed interest as I go along when the price is right. Right now I am almost near GFC levels in terms of my net wealth and the sharemarket it still 40% off it's peak. Even if the sharemarket halved tomorrow I will still be ok and any surplus dividends or rent will be reinvested.

One of the strictures which used to apply to people taking risks was the fear of being punished or social stigma if caught breaking the law.

Lawbreakers hardly consider the risk any more, whether it is drug taking, shoplifting, speeding, thuggery, graffiti, fare evasion, hooning etc

The reason is that the fear of being caught doesn't exist anymore and if you are the punishment is minuscule. Especially if you are a teenager.

Glen48 said:

What if you had to say a medical emergency , risk is doing what you think you need to at the time, I have found do it and if it didn't work it is not your fault entirely because you were using all the information you have available at the time.

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Reminds me of the example which was used during a confined space training course I sat. Two plumbers attended a problem in an underground pipe system where one climbed down a manhole in the road while the other looked out from above. The plumber climbing down fell from the ladder and his mate could see him at the floor motionless. Doing what he thought was the right thing to do at the time, he climbed down the ladder too. Both men died from methane asphyxiation.

Information is critical to me when assessing risk but in a life and death situation as you posed I admit it would be a difficult choice to make.

I guess I take more risks with my money than people who don’t buy shares – a colleague of mine likens it to betting on horses - but once invested, I tend to be fairly conservative, except I don't set stops.

I have only ever borrowed once to buy shares. It was not a margin loan; instead it was a small investment home loan with annual interest paid in advance. I invested in well credentialed stock that paid solid dividends which looked after about half of the required interest repayments. From that scenario, you can tell that I wasn’t prepared to stick my neck out with possible margin calls, but I was still prepared to borrow to buy shares. So, I minimised the risk. I did alright too. : :

I have never had an investment property. It is not the quality of the investment that has deterred me; it is the size of the investment. I prefer to invest comparatively small amounts in shares instead. The best piece of financial advice I have ever come across is to never invest in anything that you can’t afford to lose. Having said that, although the preservation of capital is important, once the money is spent on buying shares there is no point worrying about being behind. There is no law that says one must sell for a loss, and on the one occasion where a company I had shares in went belly up, I only lost a fraction of the value of my portfolio. I am also patient. Two of the 11 stocks in my portfolio are of the startup/speculative type; I am ahead on one but behind on the other. That does not worry me in the slightest. Most of my stocks are of companies that provide goods or services to the mining industry. To me that is less risky than investing in mining itself, especially if the company has some diversification to it.

Like some other members I have an online savings account with the institution that offers the highest interest at the moment. Is that risky? On the one hand it is a cash investment, and on the other there must be a reason for their offer which is generous compared to some.

But by far the biggest investment in dollar terms that I have at the moment apart from superannuation is the amount of money I have available in redraw on my home loan. I would rather leave it there than plough it all into any other sort of investment at the moment, but the last time I bought shares I did dip into it (since paid back from other means). That was risky, but I’m ahead with the shares I bought!

I don’t know how, if at all, that correlates to risky behaviour in real life. Referring to odds-on on the previous page:

odds-on said:

Risk is a complicated topic which can get a bit heavy at times. If I was to simplify risk analysis to the best of my ability then I think it should always be analysed in terms of two components:-

1. Necessity. People do what is most necessary to them at any given moment.
2. Competence. Do the people involved in an activity know what they are doing?

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When driving, I will not speed in town, but I will often set the cruise control slightly higher than the legal limit on a rural freeway, taking advantage of speedo error and police tolerance, to get to my destination quicker. There, I perceive the risk to be one of detection and fines rather than safety. But on an undulating and winding road, if I had been following a slow car until I had an opportunity to overtake, I will press the ‘pedal to the metal ‘until I am back in my lane. This minimises the amount of time I spend on the wrong side of the road, reducing risk, but the result is that I have probably momentarily sped up to 130 or more....is that momentarily risky in a quality car in good conditions or not?

Julia said:

Agree, basilio. The so called moral hazard of socialising debt and privatising profits has probably reduced the willingness of the average person to take full responsibility for their own situation.

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I think that situation has really taken hold in the banking groups. The main organisations that have taken advantage of socialising losses and taking the profits were the banks in the last GFC.

You could make a similar case when businesses demand taxpayers support and protection for their failing enterprises and then a few years later close up shop anyway.

On an individual level I guess some people would argue that almost any form of social security promotes moral hazard because people are unwilling to save the money necessary to keep them afloat through unemployment, sickness or old age. Maybe ..

To put another spin on all of this..

"If you are absolutely careful and consider all the situations that might occur almost nothing could go wrong in your life. But then very little would ever happen as well."

When I travel interstate (fairly regularly) I almost always invite backpackers to share the trips and driving. I have never meet these people before. I have almost no idea who or what they they will be like. On paper a seemingly risky proposition.

But I have never have a cause to worry and have meet many very interesting people.

basilio said:

To put another spin on all of this..

"If you are absolutely careful and consider all the situations that might occur almost nothing could go wrong in your life. But then very little would ever happen as well."

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I like this. Risk taking brings uncertainty into your life. Uncertainty is good. Not being able to know or even predict an outcome, also very good. Staying in the world of the known means you never grow. Getting the heart racing means you're pushing yourself.

Thought I would share this video,

It's an enjoyable documentary on risk.

This is part 1, to continue with the other parts search youtube " birth of speculater part 2"

Gringotts Bank said:

Uncertainty is good. Not being able to know or even predict an outcome, also very good.

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That would be the fine line between stupidity and brilliance.

Greetings --

Risk tolerance is personal and subjective. When related to trading, risk is related to profit potential, system health, and position size.

I discuss one method of coordinating those on my blog and in my latest book. You can read much of it on the blog site -- for example this article:
http://www.blueowlpress.com/WordPress/articles/why-traders-stop-trading/

There are several chapters of my book, Modeling Trading System Performance, that can be read online or downloaded.
http://www.modelingtradingsystemperformance.com/book.html

Thanks,
Howard

basilio said:

"If you are absolutely careful and consider all the situations that might occur almost nothing could go wrong in your life. But then very little would ever happen as well."

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It comes down to potential consequences.

If I buy the wrong brand of canned fish then not much is likely to go wrong so there's no reason to spend much time contemplating it.

At the other extreme, there are massive consequences when it comes to things like careers, contracts etc so there's good reason to think carefully before making a decision.

I have recently had the opportunity to get what would seem to be a "good" job that is clearly a step up from my present role. However, after careful consideration I decided not to take it because (1) I would not enjoy the work as much and (2) there seems to be a very much higher risk of the job becoming redundant in the current economic climate (3) the difference in pay is not sufficient to justify the above two points. In other words, the reward does not match the increased risk.

Careers, contracts etc you need to worry about due to potential consequences. In contrast, whether or not to go to Movie World whilst on a Gold Coast holiday doesn't need evaluation - just go there, worst case you've wasted a few $ if you don't like it.

Unless you get mugged on the way and the metal bracing fails and you fall out of the Big dipper get out of hospital and find your car stripped so you go to Starbucks for a coffee and some one jams their foot on the accelerator instead of the brake and goes straight to your table so you can only plan so much much is beyond your control.

Smurf1976 said:

It comes down to potential consequences.

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Thank you, Smurf. This is what was the fundamental prompt for my starting the thread. It has seemed to me that some people - before taking on risk - fail to say to themselves "what could go wrong and if it did, how would I deal with that consequence?" So they take the risk, not having thought this through, and when it all falls apart they claim no fault.

I think the fundamental problem in the "risk vs reward " discussion with regard to financial investments is the sophistication and self interest of the financial services sector. (BTW 'sophistication means clever lying bastxxxxs)

I think with the sole exception of bank backed term deposits every other financial investment is attempting to gain punters attention with promises of security, certainty and high relative returns. Unfortunately our broad collective experience also tells us that the seemingly most trustworthy and respected institutions ie insurances companies, banks and superannuation companies with their respective financial advisors result in the poorest returns with the highest costs. Anyway that is my indirect experience having seen the returns of friends who have invested in these products.

And having seen the way these products are structured and sold I think it is beyond most peoples capacity to effectively analyse either the story or the likely consequences.

So if investing with the biggest and seemingly safest names in the business is a poor choice how well can punters assess other investments ? I think one really has to go out on a limb and somehow disregard the alleged experience and integrity of the AMPs. MLCS and big banks and make sense of smaller direct investments.

Something else worth considering. Many older school investors stuck to buying properties for rent and hopefully capital gain. It was tangible and directly accessible. Unlike investments in property trusts or through property spruikers one had a clear line of sight to the end product. In times when yields were around 5% it all made sense. Perhaps not now when property prices are so high in relation to yields.

basilio said:

And having seen the way these products are structured and sold I think it is beyond most peoples capacity to effectively analyse either the story or the likely consequences.

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That's right basillo. In the last 5 years or so we have seen many companies go bust right here in Australia. They were the ones offering "safe and secure" investments. Some pensioners put in their life savings just so they could squeeze an extra 2 % out of their investment. The companies went bust and they were ruined, now they have to live on the basic government pension.

The point I am trying to make is that as soon as things start getting better another company with high promises will come along and take in another group of vulnerable clueless pensioners.

Right now there is a company called firstmac advertising interest rates of 7.8% for investors. For that extra 1.8% interest all of your capital would be at risk again. Again, someone new and clueless can get sucked in.

What they should do is put in big bold capital letters a message on the front page of their website saying "This investment is not guaranteed by the Australian Government cash deposit scheme, you could lose all or part of your capital." But they don't do this, why? We know the answer, they would get far less people take it on. Would I touch it? No way, too much risk for a cash investment.

Something else worth considering. Many older school investors stuck to buying properties for rent and hopefully capital gain. It was tangible and directly accessible. Unlike investments in property trusts or through property spruikers one had a clear line of sight to the end product.

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That's exactly right too. What happens is (as we all know) that a company may be sailing along just fine and then one lazy Friday afternoon (usually after the market closes) they make an announcement to the ASX. The announcement is left field and something that was not expected or ever hinted about. On Monday the share price halves, you've lost 50% of your capital in a day. This is way beyond your control as there was no information available until after the last previous days closing.

This is why I have an investment property too. No one can BS me about anything, it is mine, I can touch it, rent it and even if the worst recession hit I will always get something out of it, even if I have to reduce the rent somewhat or use it as a holiday home for myself.

The Largest threat comes from the things you don't understand and don't know about.

Like the German Back packers who pitch tent next to crocodile infested water and go down to the waters edge to wash their face in the morning.

Alot of people simply don't understand the risks that are lurking right in front of them.

In todays society we are all expected to be investors, Even if it is just your super fund you have to keep track of. But the topic of sound investment priciples is not even touched on in our schools or talked about in general.

Tysonboss1 said:

In todays society we are all expected to be investors, Even if it is just your super fund you have to keep track of. But the topic of sound investment priciples is not even touched on in our schools or talked about in general.

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Apart from reading writing and arithmetic what is taught at schools is so pathetic it's a joke.

We should be taught about, perfect computer management, Logic ie how to analyse and identify - advertising - scamming - political spin, and how to research a topic live rather than memorise outdated garbage for an exam, how to eat well, exercise and empathise.
There should also be taught secular ethics so we are educated to understand that being good to people and animals isn't for the sake of some Grand Poobar in the sky but is useful to and benefits ones own self estime, well being, happiness and is society as a whole a self and social win win.
Not learn some outdated tripe about geography, polotics, biology, the Fricken Eurika Stokade -crap etc.

One thing about real world emergencies is that they almost always involve an element of surprise. Even if it is understood that some risk exists, something comes out of nowhere and that ends up being the direct cause of the disaster.

For example, take the 2001 terrorist attacks in the US. Some may have foreseen that a terrorist attack could occur in the US at some point based on political views etc. But I seriously doubt that anyone had really considered that hijacking a plane and flying it straight into a very tall building was a likely means of attack. Those seeking to prevent terrorism would have been spending their time looking for bombs etc not worrying about people learning to fly planes. The underlying issue was foreseen, but the exact cause was not.

The same tends to be true of most things which go horribly wrong. That some danger exists is understood, but the exact sequence of events is not foreseen and thus takes just about everyone by surprise.

How many people thought there would be a nuclear meltdown in Japan as a direct consequence of an earthquake / tsunami? Everyone knew that a tsunami could occur and everyone knows that without cooling a nuclear plant can melt down. But pretty obviously the exact sequence of events either wasn't foreseen or was considered so unlikely that nobody took action to address it. It's those things, the unlikely and "impossible" ones, that tend to cause major disasters...

So far as investing is concerned, the same principles apply. There is always something which can go wrong that you won't have foreseen and/or won't have dealt with. There is no such thing as zero risk.

Smurf makes a very pertinent point regarding the knock on effects of particular events.

I think this is far more important now because

1) Everything is so interconnected
2) Modern business techniques have emphasized just in time practices which mean that any hold up will cause immediate problems
3) Modern business practice (again) has reduced the amount of redundancy and thus resilience in our economic systems.

In that context it's interesting to look at GFC 1 it's consequences and where we now stand. When the first Global Financial Crisis hit there was real fear of a complete meltdown of our financial systems. We had bank runs and the threat of further runs. (no one has yet demonstrated how our current economic systems would operate if there was a systemic banking crisis).

In a swift united effort all the major economies threw trllions of dollars at the banks to keep the system operational. We breathed a sigh of relief when we seemed to dodge the bullet.

Three years later it is now countries not banks that are threatening to drown and there appears no plausible way to keep the current financial systems operating.

This has to be the biggest risk we face but what can be done on an individual level ? So what steps are governments preparing to cope with a disorderly default ? And should we be told about these steps to keep up public confidence ?