Why Investors Should be Risk Focused Instead of Return
‘Risk’ the common word become one of the prime contexts in today’s business arena. Billions of dollars are spent to deal with the word with a view to control over plan in different economies, industries & businesses as well. By definition its nothing but the deviation between expectation and actual outcome. As we don’t know the future & we haven’t control over future, therefore risks take place in case of business activities. In a straight forward balance sheet, managers have to deal with assets, liabilities & equity to ensure profitability, efficiency & solvency. In all the matters associated in balance sheet management, risk is associated.
Commonly risk has two aptitude, one is upside (known as return also) & another is downside (pure risk). Also the total risk can be subdivided by systematic and unsystematic risk.Unsystematic risk can be diversified through some techniques but systematic risk can’t be diversified. In business risk exists in both internal & external environment. Any investment carries different degree of risk even in government instruments also. Investors want to lock their potential to go ahead with their specific objectives. Some of them want higher return on investment at higher risk & some of them want moderate return on investment with a minimum risk. As we now facing the global geo-political & economic disturbances, the downside potential has become more likely with the investment held by different entities. Based on the observation of 2007 global economic crisis, we found greedy investors engaged in trading securities at hyper risk level. In that time, investors’ expectation on their investment was supernatural which was one of the prime causes of the failure of US mortgaged backed securities.
Considering the Bangladesh stock market debacle in 2010, we could find the same reasons while investors became too aggressive to hunt quick cash from their investment with higher expectation. Later after the stock market crash, investors lost their numbers manifold in their profit/loss statement. Till date some are unable to get remedy from that financial injury. Some even injected more funds to rebalance their portfolios because they fell upon the sunk cost trap but can’t recover the losses. This is the common scenario of taking extra risk on investment exposure.
Managing risk or hedging concept introduced since a long ago. But in Bangladesh we lack instruments, strategy framework, good corporate governance & most importantly the awareness. Some of the investors who are risk focused or intends to hedge over their investments, lack necessary arrangement to lock their downside potential. Investors can’t ensure risk response in effective way due to many factors affecting investments like political debacle, corporate scandals, stakeholders’ conflicts & greed. Investors need hedging instead of speculating to protect their existence in the economy. If greed takes place against awareness, the future would be uncertain for welcoming probable losses on investments. Adequate measures have to be set & implemented to fight against risk in the area of business, politics, environment & society.
Disclaimer: This publication is produced by Research and Innovation Lab at Royal Capital Limited (RCL) solely for the information of Clients of RCL. Clients are expected to make their own investment decisions using any information contained herein. The contained information in the report should not be interpreted as an offer to sell, or a solicitation of any offer to buy any investment. Projections of potential risk is based on published information but does not guarantee of any actual risk or return to be materialized.