Como entender os riscos das diferentes opções de investimento?

Investments can be subject to (but not limited to) market, liquidity, credit & interest rate risk. Volatility is a typical measure of risk. However it has limited utility given it treats profits and losses equally & is backward looking with little predictive power. Investors should be aware of the probabilities of tail end events that can lead to asymmetric drawdowns or permanent losses. Any understanding of risk is inherently specific to the investor, their time horizon, expected outlays, life expectancy. Therefore relying only on standard volatility measures would be an insufficient & in many cases inaccurate way to assess risk for YOU. Having a robust framework & disciplined approach is the best way to mitigate risk.

The first place to start is to understand the cash flows (CFs) of your different investment options. Risk can be thought of as the uncertainties surrounding the receipt of each CF on your investments. CFs from investments differ according but not limited to the following: 1. Nature of CFs (promised/not promised 2. Frequency of CFs 3. Referenced or not referenced to an underlying. All the above impact the risk on your investments differently according to factors (usually macroeconomic) that affect them e.g inflation, interest rates, exchange rates and market volatility. Your work therefore is to understand how these factors interact to increase or decrease the risks associated with your investments.

If I make it short, it is the potential for negative outcomes or losses due to uncertainties! I believe it is very important to understand systematic risk and unsystematic risk. Since risk can not be eliminated, every strategy of risk management should focus on the maximum level of mitigation.

Every asset class is different from each other and carries some similar and some different kind of risks. E.g. equities carry business risk- which is factor of multiple factors (economy, competition etc) While debt products carry certain different risks like liquidity risk, credit risk etc So, its important to first get some understanding of the various types of risks which are there in the world.

Understanding your time horizon is important when evaluating different investment options. High risk investment products are not suitable for short term investment needs. A longer time horizon gives enough runway for an investment to recoup any potential losses.

Risk is a subjective matter depending upon your psychographics and demographics. Investment in crypto can be lucrative for an investment banker but might not suit a retired professor. Risk is also evolving depending upon political and economical events, it keeps changing its value. Investment in Dubai's real estate was attractive pre-covid but now is considered risky due to dryness in the market. Nobody can define risk for you other than you. However, what can be an optimal strategy is to define your risk tolerance level, your goals and any limitations.

While it’s true that risk can come from different sources, it’s important to note that not all risks are equal. Some risks can be managed and even turned into opportunities with the right strategies. So, understanding and managing risk is a key part of successful investing.

Types of risk can be defined by external or internal nature, hence risk that you can assess by individual asset or its exposure to macro effects. Similarly some internal risks might be ones you can control or influence, and others you cannot.

Carefully review the financial statements and prospectuses of companies or investment funds you're considering. These documents provide valuable information about the financial health, risks, and investment strategies of the entities involved.

Risk in investment strategy refers to the potential for financial loss or volatility associated with an investment. It encompasses the uncertainty of returns and the possibility of losing the principal amount invested. We heard a lot about risk in traditional finance and in the cryptocurrency space, it extends to smart contract vulnerabilities, liquidity risk, and the emerging MEV (Miner Extractable Value) risk, which has gained recent attention.

I remember while studying for CA for Costing and Risk Management paper, we were taught about how to measures risk. Risk measures can include:- 1. Standard deviation 2. Beta 3. R-squared 4. Alpha 5. Sharpe ratio

There are many technical parameters to measure risk, which are commonly reported on financial websites for those products. But its important to compare risk of products which are similar to each other or atleast in the same asset class. It is not correct to compare risk of a Corporate Bond Fund vs that of an Equity mutual fund. Both carry very different type of risks. Hence we will be comparing apples to oranges!

Looking at just historical realised standard deviation is not enough. Important to also look at the implied volatility from the options, giving the expected standard deviation, but also to look at the expectation of price distribution. And to always consider your tail risks.

While standard deviation and beta are used to measure risk, remember that knowledge is a powerful tool in managing risk. These numbers are helpful, but they can't predict everything. Learning about the investments and staying informed can be one of the best ways to reduce risk.

In my opinion, Managing Risk is one of the most important things in life, whether it is for investments, business, professional life etc. One of the recent risks, which is affecting most of us will be Geopolitics, we need to become truly global citizens and be prepared to relocate if things get tough in our current location.

Returns are always proportional to risk! This is the immutable law of nature! All we can do is to evaluate it fairly and match it with our comfort level. At what risk-return level do we feel ok.... Volatility & Liquidity are usually the other 2 parameters to look at apart from risk & return, while evaluating any product.

With regards to investments, different asset classes, such as stocks, bonds, real estate, and alternative investments, carry varying levels of risk, and so do their returns. So, comparing risk between bonds and equity is an apple-to-orange comparison and is totally unfair. However, within each asset class, there are unique risk metrics and ratios to quantify risk. For instance, for equity, common metrics include standard deviation, beta, and the Sharpe ratio. These metrics provide insights into an investment's volatility and risk-adjusted returns.

Risks are proportional to returns in a completely open, perfectly functioning market. In some asset classes, especially private markets, you might find access to opportunities with a higher Sharpe ratio than the benchmarks.

In addition to statistical measurements of risk, risk is professionally evaluated by dedicated professionals at ratings agencies such as Moody's and Standard & Poor's, as well as banks and investment managers. These ratings can be consulted in addition to your own analysis of statistical and qualitative risk factors.

By the famous CAPM (Capital Asset Pricing Model), we know while the effect of diverging risk by adding into the portfolio another asset from a single asset is huge, the effect of diversifying the portfolio with 15 different assets does not differ much with a portfolio with 100 or more assets. So, you don't need to have a big basket like mutual funds etc. but you can have a smaller but well diversified portfolio of your own as well. It's simply said, "don't put all the eggs in one basket".

While diversification is good, over-diversification can be counterproductive. Investing in too many similar products might just increase the costs as well as complexity of our portfolio. Should try & keep it simple. Force ourselves to make choices.

Diversification is one way to reduce risk. A pool of atleast 15 different assets offer the best risk reduction strategy but the selection of assets should be based on industries, size of the company, its revenue drivers etc. Some picks should be based on value and some should be given credit due to its upcoming growth. Finally, dividend yield and tax reliefs should also be part of considerations.

Risk is directly proportional to your return on investments (ROI). Even low-risk tools carry the risk of erosion of your money over long-term due to inflation. In my opinion, the age-old strategy of "diversification" is useful for all risk appetites. This basically involves spreading your investments across various asset classes, such as stocks, bonds, insurance, and real estate. This ensures your portfolio is able to withstand all kinds of market conditions.

Asset Allocation is the critical yet under-rated tool to manage risks...as we progress through our life. E.g. when we are 12-16 months away from any major goal, it would be prudent to start moving the money to safer and more stable products (like Debt funds, FDs) so that we are sure that we have the hard earned money available when we need it! The other critical way to manage a major risk (risk of LIFE) is getting sufficient INSURANCE!

Too often, people are holding to a money losing stock too long and selling off a money making stock too soon. Market is a irrational animal and only those with rational minds can harness and beat it.

Consider that risk appetite is extremely individual as it might depend a lot on the funds you might invest - your dependency on those, liquidity of assets, overall portfolio and simply your own appetite / comfort with risk

Parafraseando Nassim Taleb: “Em uma estratégia que implica a ruína, os benefícios nunca compensam os riscos.” De forma que não adianta voce pensar, “Ah se eu tivesse pegado dinheiro emprestado em tal ano, investido nisso ou naquilo, hoje eu conseguiria pagar a minha dívida e hoje estaria milionário.” Sim, mas isso já aconteceu e o futuro não tem nenhuma obrigação de repetir os eventos passados, então se você adotar essa estratégia, que pode até ter dado certo para alguém, você estará flertando com a possibilidade de ruína.