This my tenth article on the nuanced concepts of investment risk for life insurance salespersons. You can read all my previous articles and more in my Blog https://www.helpindiainsure.iistpune.in/category/finance-for-life-insurance/. Life insurance salespersons will sell ethically and correctly, if the concepts of investment risks are understood. Each of the articles so far and the subsequent ones to follow will explore the concept of investment risk in all its nuances.
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Most financial analysts will tell you that risk can be calculated by measuring the market volatility of share prices. The more volatile the prices, are the riskier the investment is what they contend. They present solid equations to calculate the β, the standard deviation and what not. The result of the calculation is then projected as the result of a scientific process and therefore cannot be wrong. Nothing can be farther from the truth. In built into all those calculations is the use of probability theory. And probability theory does not give accurate results. The future cannot be seen even with probability theory. With or without probability theory the future cannot be predicted. This is common sense. We are not god.
Price volatility is not on the investors’ minds
We are told that investors are concerned about price volatility in the share markets and that the investors’ investment decisions are based on how volatile the investment is. The more volatile, the more the risk. Hence, we are told, that investors will avoid highly volatile investments.
How many investors genuinely feel that the since the price volatility on a share is very high, they would rather not invest in that share? A volatile stock is not necessarily risky. If luck was on your side, you could end up buying a volatile scrip at the bottom of the price fluctuation and sell it at the top of the scrip’s fluctuation. A highly volatile scrip is no more or no less risky than a scrip which is not so volatile.
Risk assessments of investors
In reality, investors do not worry about volatility. Investors do not correlate volatility with the riskiness of the investment to take their investment decision. They worry about more important things such as: “Will I get my money back?”, “Will I make a profit or loss?”, “Will I earn sufficiently on the investment for the risk I am taking?”, and so on. This is the risk assessment that plays on the minds of investors.
Almost every investor will worry about the risk of not getting his or her investment back or not earning a profit on the investment. As Howard Marks says in his book “The Most Important Thing”, risk cannot be measured, since it is subjective. He defines risk as the likelihood of loss.
Risk cannot be measured
Risk is such a concept that it cannot be measured either before the investment is made or when the investment is sold to make the profit or loss. In the logic of Howard Marks, suppose you make an investment today which doubles in one year – is it because the investment had high risks, which luckily for you did not play out? Based on this successful investment is there a guarantee that your next investment will also be successful? There is no guarantee. For you do not know which of the risks did not appear in the investment you just made a profit on and therefore you made a lot of money.
No investor or financial analyst is in reality aware of all the possible risks while making the investment. Similarly, no investor or analyst is aware of all the possible risks that did not surface while holding on to the investment till the time the investment is sold. Since risk-events are not known, they cannot be measured.
Risk is subjective
Risk is a perception. Twisting an old idiom to make a point, “What’s good for the goose is not necessarily good for the gander”. Indigo Airlines is currently going through a lot of operational problems, which may not be solved too soon or may be not at all. Their share price has fallen. I may think that investing in the shares of Indigo Airlines now is not risky, believing they will overcome their problems. But others may assess that Indigo will not be able to come out of their current problems and therefore too risky to invest. This is the subjectiveness of the concept of risk. Risk is not whether the standard deviation is high or low. It is not whether the β is more than 1 or less than 1. It is a perception of the individual trying to take an investment decision.
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Course: Finance for Life Insurance Sales Professional (FLISP)
This is what you will learn when you join the unique, tried and tested method of IIST’s Finance for Life Insurance Sales Professional (FLISP) course. Visit our https://www.iistpune.in/finance-for-life-insurance-sales-professionals-flisp/ to know how we can help.
More insights in my next article. Look out for regular articles on the concept of risk. In the meanwhile, you may also visit the website (https://www.iistpune.in/) of The Institute of Insurance Sales Training (IIST) to know more about the number of ways we can help you reach great heights in life insurance sales team building and selling