Every mutual fund investor is an aggressive investor these days, especially the young and new ones. When asking them about their risk profile, we got these kinds of replies:
– “I am prepared to bear huge risks because the overall nature of equity is volatile.”
– “I am young and okay with high risks.”
– “I am investing with a long time investment horizon. So I am prepared for very big risks.”
– “We all realize that Equity is volatile so I am prepared for big dangers for higher returns.”
But If you try to talk to any of them – about the difference between risk-taking capacity or the willingness to bear the risk. Or even the difference between the perception of risk and the actual risk. You will get to hear the most common stance – We run an aggressive risk profile, and we are good with an association of additional risk with our investment choices.
So, What’s Making Investors Putting Their Hard-Earned Money Blindly These Days?
Many experts or financial planners addressed this new trend that has emerged in the post-COVID market situation. Investors are fortified with an upward trend in the stock market. Disregard of Doomsday prediction, the stock market rallied from march lows within a few months. However, the gains are being erased now and then.
So how does this change in buying affect one’s risk profile or appetite? The new Braveheart’s say that the answer is straightforward; many investors believe that there is nothing to be afraid of; even if it’s the sharp fall in the market, it will come back onto the track immediately. At least that’s what the history of the Indian stock market has witnessed from the large falls in the market in 2000 or 2008. However, this might be a wrong lesson for traders.
What’s the Right Approach for Traders?
The statutory refusal performance of the past does not give surety of the performance in the future for a reason. Quick recovery of the market from the COVID crisis does not mean that it will always happen this way only. What if it goes in the opposite direction to your imagination? Will you be able to bear the hit?
This is the entry point of real risk appetite into the picture. It is very easy to say; I am okay with taking a risk because of a long horizon time, or I can take the risk because of nature of equity is risky; all this might sound appealing to you. But we would like to ask a very simple question: Market did not respond the way you imagined, resulting in losing 80 per cent of your capital. Would you be able to hold onto your profile and wait for 6 or 7 years for the market to make up your losses or to give you gains?
That question possibly would have changed your mind about the actual meaning of aggressive investors or people’s perception of investing for a long investment horizon, or I can take very high risk.
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