What is investing Risk: Financial Planning

How did it feel when the Sensex was at 9000 and Mr. Doom Sayer was predicting sensex at 6500 as the next stop? Did you stop to WRITE down that feeling?

Risk is funny – you need to feel it in the bones. And more importantly remember it!!

With the Sensex up more than 80% from those dark days most clients are acting like they never worried about the index. Funny it is becoming very easy to forget what things they told me then! If you did not write it down it may be a great idea to write it down now. Along with it promise yourself what shares you will buy at what price when the markets come down. Come down it will, for sure.

However if you are comfortable buying Tata Steel at 400, do not change your lower limit to 300 because it has already reached 345! Recently I bought Bharati Air Tel at 287 – just before one more round of price cuts were announced. Can it go to 230? Sure why not? Should you buy when the price is 287? Well yes, you are shooting in the dark are you not? Is is true that all the bad news in the telecom industry is over? Who knows? I know if I decide to buy 3000 shares, I should pick up 400 or 500 shares without worrying too much.

You may have already forgotten the days of 9000, but back then, there was an almost universal recognition that risk was in holding equity! When the market falls, the client wants to sell. Everybody is saying that the market will fall further so, so I must sell – this is generic panic that it is all. Even after so many years in the market if I can convince a client not to sell or react in panic, I think it is my luck – and the clients luck. Rarely is good advice remembered – forget being thanked.
But it is perhaps a great time now as the time to remind them what it felt like? Remember that conversation about how we (and they) wished we had taken less “risk”? Remember how they promised that if ‘we’ just got out WITH THEIR CAPITAL INTACT we would be more careful next time? How ‘you’ had asked them to invest in equities and how now ‘their’ portfolio was threatened?

Or how now they are so LUCKY that they did not sell? Laugh out Loud.
One of the things that we I want to now do is to ask for customers in writing about what they want. Of course this does not stop them from Expecting 40% compounded return (at least at the beginning it is easy to cut it to 14% – they sound similar!

Unfortunately my questionnaire does not ask them how they felt last time they lost money in a trade. Some clients just bluff if their spouse is around. One wife told me her husband does not sleep if he has lost a lot in the markets – he needed sedatives. I think a note about how they felt about the risk they were experiencing should be a useful addition to my already long questionnaire.  I want them to write about this desire they had for lower risk, and the fact that they were more than willing to accept the lower expected return that comes with it.

I do not know whether they are willing to accept a lower standard of living in retirement. If they want less risk but a higher Real return, they have choose  between the two risks.

Who knows where the market is headed from here? Surely to 21000 or surely to 8499? I have no clue but the same person who had predicted 6500 is now predicting 21000. Picking the correct number from the numeric soup you read or hear is difficult. Alas! It is not a skill I possess either. However, when the very same people that could not sell fast enough at the bottom now want it all back! Now  it is time worry about the client. He is looking for entertainment, not investments.

So now what?
If they wanted out, but only stayed in because I hand held them back from suicide point, do I have to reallocate their funds to have more debt? I have no clue. Either I take a very high stand and say ‘I know what is good for you’ so do not over excite your brain. Or I can take the more difficult route of teaching him the logic. Well I frankly do not know what to do.
If you rebalanced into the market back then, shouldn’t you be re-balancing out of the market now?
What if someone sold back near the lows on their own, and now wants back in because things have cleared up” and Cnbc says the market will reach 33000 soon?  Do you allow them to buy back in under your watch? Or do you say Go……

Clearly, the tough questions have not ended, nor is my search for a rational investor. Never found him except in Economics Books.

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2 Responses to “What is investing Risk: Financial Planning”

  1. Ravinder Makhaik on April 11th, 2010 at 11:52 am

    Sane advice is hard to come by – but as a fringe benefit of your being a financial trainer who also runs this blog, some nuggets do drop out that help to instill confidence when the market is down and also contain euphoria when it touches dizzy heights.

    Remaining level headed is hard, where a human is nothing but a bundle of emotions.

    The losses were heavy when the market touched a low, just a year and a half ago. In what appeared to be a round of political instability before the general elections results but SMS (Sardar Manmohan Singh) back in job, one your blog post put it as a time for free sale. Tata Steel had dipped to Rs 140, but I had run out capital.

    The little surplus that I could invest way back then, doubled in less than six months, leaving me wondering why I exit those scrips early.

  2. Every day I think of you and curse all those people who have made Shimla into a hell hole. Full of brick, cement and steel the trees gone, …it is deteriorated so bad that it is shameful. Last time I went for a walk …I smelt nice diesel. The same smell that u get when u go for a walk in Bengaluru, and Mumbai.

    Delhi and Chennai seem to be far superior….sorry completely out of context but aimed at Ravinder Makhaik….the well wisher of Shimla…

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