Emotional triggers can play a decisive role in the way we deal with our finances. Risk planning becomes important in such situations
A FEW weeks ago, I saw a teenage neighbour moving around on a new bike. He was all over the place, performing stunts and trying to do every possible trick he could. Finally, when he stopped, I asked him if all this was worth the risk he was taking with his life? Being all of 19, he smiled at me and said, "What's life without a little risk?" And that he bought a new bike, despite the risks involved and understanding them.
Listening to this 19-year-old made me wonder, do we ever profile the risks involved on the path to our goals? And how would they affect not just our finances, but also our goals?
You may say risk profiling is the answer, but this tool is not the only answer.
i Profiling helps you understand the risk of a goal. One cannot guarantee satisfaction from this profile alone. For, there are factors such as market condition, emotions of the goal seeker and e the time frame of the goal, which add to the risk involved with an investment.
Consider this: when market conditions were good and Sensex was racing towards the 20,000 mark two years ago, every investor's risk profile was aggressive. The same investors turned prudent when Sensex fell to 8,000.
Factors such as these throw risk profiling off track, and thus may end up putting one's goals at risk.
A simple way to reduce risk is to consider a goal-based profile. A goal-based profile can help you understand how you should analyse your risk, keeping in mind the various factors that contribute to risk.
For example, if an individual's goal is to buy a house in the next 20 years, then his approach towards the goal can be bullish, since daily or even monthly market fluctuations will not affect him.
However, if he needs to reach that goal in three years, his plan and approach will need to be more prudent, considering the fact that he has to first safeguard his capital and then think of earning from it as an investment.
This method helps, as you would know that you will only be risking a negligible part of your investment and will not be vulnerable to other conditions. Also, emotions play a big part in an individual's goals. Your finances and emotions are inter-linked to each other, as every individual shares a personal bond with his/her money. Emotional triggers can play a decisive role in the way we deal with our finances.
Risk planning becomes important in such situations, as it helps you understand not only how your emotions can trigger your finances, but also vice versa.
Financial planners take into account this emotional factor and that is why they often insist on regular communications to help you understand the way money moves in the market and guide you in a logical manner when you feel your resources and investments are at risk.
There are risks everywhere. However, there are ways and means to understand and tackle the same. For, like my 19-year-old neighbour says: What's life without a little risk?
