The amusing thing about risk is that none of us understand it. A Few people like Taleb understand that they do not understand it. That is what makes him or a Peter Bernstein an expert, and all of us novices.

Let me narrate a few REAL LIFE INSTANCES and you can decide whether it can ever happen to you:

1. An 80 year old man says “I have Rs 70L, I am sure that now nothing can go wrong in my life AND I am fully financially secure”.

My answer: Having your own house, a large second round of family (no children, wife has died, staying in a senior citizen home which has geriatric care) is a nice situation, especially if you are mentally alert. Imagine what happens to this man if he is bedridden TODAY and stays like that for 8 years? Well if he is spending Rs. 1L a month  on nursing, food, medicines,…etc. he will run out of money in exactly 70 months. Actually he does not have Rs. 70L. He has 15L in senior citizens saving scheme and Rs. 20L in LIC getting a pension. Are they his assets? yes of course but both are ILLIQUID (and hence the good returns).

Questions to ask:

1. Has such a thing happened in the past?
2. Has it happened to somebody you know?
3. Is there any guarantee that it will NOT happen to you?
4. Why are you in denial that it will NOT happen to you?
5. Is the situation to scary for you to even THINK of such a possibility?
6. Any particular reason why it can’t happen to you?

Case 2: You are 40 years of age. Unmarried. Parents have a good pension. You have your own house in Mumbai, a portion of the loan is the be repaid. You have Rs. 2 crores of equity in your demat account. You have Rs. 20L lying in your savings/ fixed deposit account. Your loan outstanding is Rs. 30L – and you are confident that Rs. 30K a month will not ever bother you. You like the tax benefit in the home loan interests (stupid idea, but nevertheless). Life is great.

You have an accident. You are in coma. Your parents rush from Dehradun to look after you. They bring you home from the expensive hospital. It is costing your dad Rs. 1L per month to look after you (the vegetable).

Problem is that your accounts were are single, did not have a nominee, and your dad’s cash flow is not so great, and …

now ask the same questions again.

The most important thing about risk is that we can’t ever, ever anticipate all the problems. Hence the need for a nomination, power of attorney, will (registered), teaching personal finance to spouse and family,…..communicate, communicate, communicate….with all the stake holders.

Remember, you can ONLY mitigate risk. For other risk, turn to praying.