“I am okay with high risk. I am young.”
“I am ready to take large risks because I know equity is risky.”
“Since I have a long investment horizon, I am ready for very big risks.”
“I know equity is risky. I am okay with huge risks for better returns.”
You can try to talk to them about the difference between their perception of risk and the actual risk. Or even the difference between risk-taking capacity or ability to take risk and the willingness to take risk. However, most probably these investors would dismiss all these finer aspects of risk profiling and stick to their stance: we have an aggressive risk profile and we are okay with the extra risk associated with our investment choices.
What is happening? Why is everyone `aggressive’ these days?
Mutual fund advisors and financial planners say this new-found confidence is a recent phenomenon, especially in the post-Covid market scenario. They say these investors are emboldened by the upward trend in the stock market. Defying doomsday predictions, the stock markets have recovered from their lows within a month. Even though the undertone remains nervous and the gains are erased every other day, key indices have been inching up for some time now.
Are you wondering how that changes one’s risk appetite or profile? Well, many investors are beginning to believe that the sharp fall in the market is nothing to be scared of. If it falls sharply, it would also bounce back immediately. At least that is what the history of Indian stock market tells us, they say. Indian stock markets have always recovered sharply whenever there were large falls in the market – be in 2000 or 2008, the new bravehearts say
However, this could be a wrong lesson to learn from the market. The statutory disclaimer `past performance does not guarantee future performance’ is there for a reason. Simply because the market recovered most of its lost ground quickly in the past major crisis does not mean that it will always happen – be it now or in future. What if it doesn’t happen the way you imagine? Will you be able to withstand the hit?
Well, that is where the real risk appetite comes into the picture. It is easy to mouth lines like `I can take risk because I have a long horizon or I am okay with very high risk because equity is risk’ may sound convincing to you, but you should ask this simple question: would you be okay if you lose most of your capital, say, 80%? Will you be able to hold on to your investments and wait for five or six years for the revival of the market to make up for the losses and make extra returns?
That might give you a rough idea what it means to be an aggressive investor. Also, what does it mean when you say I have a long investment horizon or I am okay with the extra risk.