Thanks to the computing power and creation of calculators, and risk questionnaires many people think that they can UNDERSTAND risk better. Sadly understand power has not really increased as well as the increase in Computational Power. So most of us can fill in questionnaires, do complex calculators and think we are MANAGING RISK. Actually there is a difference between managing risk and the feeling that we should be managing risk. We are NOT in the first category. We are in the second. We know that we have to manage risk, but we have absolutely no clue how.

What are the real risks in the portfolio of a common man?

1. Not being able to meet his NEEDS: If a person runs out of money and is unable to meet his goals. Goals can be the way he educates his children, the way he would like his parents to get medical treatment, the way he would like to retire. Many other goals are of course wants and luxuries – and he may be willing to compromise on that.
2.  Market Risk: that part of the risk that cannot be wished away by diversification. I guess this is easy to understand.
3. Aspirational Risk: the risk that you are willing to take in your portfolio so that you can achieve a higher standard of living. This should not destroy your portfolio.

Largely we are seeing 3 things – your willingness to take risk, your need to take risk and your MENTAL ability to take risk. Only if you are able to handle all 3 factors can you arrive at the best Risk-Reward portfolio. Or what I call omptimising risk.

Instead of looking at risk like this, people flock to finance professionals who have some quantitative tools and arrive at the client’s ‘risk tolerance level’ – at best that is just the starting point.

Risk is not being able to meet your goals – however audacious they are.

Chasing a benchmark makes no sense.

Chasing a benchmark makes sense because people want to do something constantly.

I have stuck to Franklin Bluechip, Prima, Prima Plus, Flexicap, Hdfc Top 200, Hdfc equity, Hdfc Growth, Templeton India Growth fund, Icici Prudential Discovery, Hdfc Prudence,  – since the 1990s and do not have too much regret. I have looked at many funds and I am sure that there are many other good to very good funds who may have given good / better or far better results. However these funds will help me meet my goals, and that is enough.

Goals-based invested can be difficult because

it involves delayed gratification

a long-term mindset,

having nothing to do on a Q on Q basis…

However, in the bigger scheme of things your biggest risk as an investor is putting yourself in the position of not achieving your goals.