Is risk taking a chunk out of your portfolio?

People often believe that "The biggest risk in life is not taking one." Movies, books, popular icons, etc. seem to echo the same sentiment. However, according to me, based on my experience of talking to hundreds of investors over a decade, the biggest risk in life is taking one but believing you have not taken any or taking one but not understanding the consequences of your decision.

When it comes to making equity investments, time and again investors tend to focus on the wrong set of parameters such as oil prices, stock prices, interest rate. People spend countless hours watching business channels, reading magazines for hot tips, tracking the unknowns but there is hardly any time spent on the knowns, which in fact, is in their control.

I have shared some of the 'Unknowns' that we so often focus on and the 'Knowns' that we ignore most of the time.

Unknowns (Not in anyone's control)
•

• Sensex and Nifty behavior
• •Stock prices
• •Oil prices
• •Interest rates
• •Inflation
• •Tax laws and regulations
• •Geo-political risks

Knowns (In your control)
•

• Your needs and goals
• •Your investment time horizon
• •What you want to achieve in our life
• •How you react to different things including stock market ups and downs

When it comes to investing, to be a winner, you must make as few costly mistakes as possible. While a lot of people would like to believe that they are above making investment mistakes, there is no one in the world of investing who has not made a mistake. The key is to understand how to avoid making costly ones. Understanding and managing risks are the most important part of this. Take too much risk and you might jeopardise your financial future with huge losses. Take too little and you jeopardise your financial future with returns barely enough to cover your lifestyle expenses.

So, how do you determine how much risks you should take and are you taking enough?

First, determine what returns you reasonably need to achieve your financial goals. So, if you need a 10% return, why would you opt for some exotic investment or trade like a maniac? I met a person recently who tracks the market day in and day out, devours every investment magazine and invests in high-risk stocks like small caps and mid caps. Guess how well his portfolio is doing. From a value of Rs 4 crore, it has come down to Rs 2.8 crore most of which I would attribute to a pinch of foolishness (with due respect) and a dash of arrogance. He could have simply opted for a balanced mutual fund or a large cap mutual fund that would have given him returns between 10% -12% p.a. There was no need to go for such high-risk products.

Secondly, you must annually review the performance of your portfolio in line with your goals. Knowing your benchmark can help you avoid taking more risk than necessary. You need to strike the right balance between your investments and our goals, risk appetite, and goal time frame.

As Ben Graham says, "The best way to measure your financial success is not by whether you are beating the market but by whether you have put together a financial plan and a behavioural discipline that are likely to get you where you want to go". In the end, what matters isn't crossing the finishing line before anybody else but just making sure you do cross it.

How do you know if you are taking too many risks? Ask yourself.

1. Have I lost sleep during a recent market crash or in general after making the investments?
    
2. Do I feel pressurised to watch stock prices, fund NAVs weekly or daily?
    
3. Do the 'Unknowns' given above worry me about my financial future?

If you have answered yes to any of the three questions then, you have taken more risk than you can digest.

If you answered yes to all the above, then it might be time to put some of your stocks/equity funds away. As F Scott Fitzgerald said, "If you don't know who you are, the stock market can be an expensive place to find out".

The writer is founder, Happyness Factory