How much risk can you take?

The word risk is difficult to define. Just for this article I will define it as the ‘ability to lose capital’. Assuming this is the definition of risk, can you answer “how much risk can a person take?”

For most relationship managers who have learnt ‘risk’ from high sounding professors (who have never met a client) this question is answered by filling a ‘downloaded’ questionnaire. This q will have some simple questions like age, number of dependents, future income, rate of growth in the future income….etc. This will lead them to say

“Sir, you are 71 years of age so you should invest 100% of your money in debt instruments like…..”. However there are 2 things with regard to risk:

a. Need to take risk    and b. Ability to take risk.

Need to take risk is clearly a function of – what the client wants to do – I know of a 81 year old who has a net worth of Rs. 8 crores, 2 sons earning at least Rs. 1.5 crore a year. He has about Rs. 20 lakhs in a bank fd and the balance in equities. He understands markets, is active, has a man friday who drives his car, does his laundary, goes to the bank….the works. This guy happily deals in FnO, buying selling the index, etc.

He does not take advice from any banker or broker.

Ratan Tata, Narayana Murthy, Rahul Bajaj, Anil Agarwal, – are all 70+……surely they have slightly more than 10% in equities! Ok, ok Narayana Murthy is only 63…but I had to make a point, you see!!

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