Do we know what risk is?

Risk can mean something different to different people. The notion we have, as well as the importance we give to certain types of risk influences our investment, which can be both an advantage and a limitation.

There are many types of risk. The risk of not being able to sell our assets (liquidity risk), the risk of a company, whose obligation we hold, going bankrupt (credit risk), the risk of the investment fund manager we buy making bad investments, among others . Be it the momentary or total loss of invested capital.

If we were to enumerate and explain the types of existing risks we would have in our hand a series of articles, not just this one.

The best definition I've seen of risk was “the probability of not achieving our goals within the stipulated period”. It is the most comprehensive definition I know, while it correctly conveys to us what could be considered a risk. Any event, be it credit, an increase in volatility due to an economic crisis or recession, or even an increase in volatility for no apparent reason, if it contributes to a lower probability of achieving our objectives and investment plan, should be considered a risk.

I think this concept is so good that it makes us think about what is, in fact, a risk and that it can often go against what we feel emotionally. Let's imagine a young person who has recently started to invest with a view to very long-term savings. Faced with a downturn like the one we've experienced this year, should you consider it a risk or an opportunity? Regardless of whether we can “feel” this as risk, it should most likely be seen as a good investment opportunity. The truth is that the definition of risk transcribed above says so, not least because the fall of the stock market, and the consequent increase in expectations of future returns, increases the chances of achieving our goals. It does not guarantee that we will achieve them, but it should increase the probability of doing so as assets have more attractive ratios.

Volatility is not the same thing as risk, and investors who think it is will cost themselves money. Warren Buffett.

I would like to demonstrate in this example that risk is something complex and ambiguous, centered on the investor and his investment time horizon. That even a fall in the stock market can be seen not as an increase in risk but as a decrease in risk.

This article aims to make us think better about what risk is, what it really means to each of us rather than letting our emotions get carried away and abandoning or altering our plans in an event like this pandemic.

In the end, the market has rewarded risk and times when risk is (or seems to us) higher it has also historically been the best times to invest.

Warren Buffet says volatility is not the same as risk. I would say volatility is not necessarily the same as risk.

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