(Article for the Jakarta Globe – 21 May 2012 issue)
PERSONAL FINANCE
ARE YOU A RISK TAKER?
Do you enjoy mountaineering, abseiling, sky-diving, driving in Bali or similar? If
so, you can reasonably be considered a risk taker. In which case there is also agood chance you take risks where investments are concerned. Is this a goodthing or not? Read on…
The relationship between risk and return
The ideal investment would be one that pays a high rate of return but with norisk of losing capital and access to that capital at all times. Unfortunately nosuch investment exists. If it did there would be no need to invest in stocks,
bonds, commodities, property or any other asset where money can be lost.
The fact is that there is an inverse relationship between risk and return. If you
are looking for an investment with a very high return then the risk of losing
part or all of your money has to be accepted as a possibility. If you do not wantto put your money at risk you should leave it in the bank and be satisfied witha minimal return.
But there are other dimensions to risk
While the risk / return relationship is a valid one it is not quite so simple. Timeis another factor. For example, buying shares with the intention of selling themquickly could easily result in a loss. But if you are buying a share in a solid, ‘bluechip’ company with the intention of holding on to it the risk is actually quite
low since the chances are it will appreciate over time and pay healthy
dividends along the way. To be safer you should buy several stocks since evena solid blue chip company can ‘hit the kerb’, as in the case of BP, whose shares
halved in value immediately after the disastrous blow-out in the Gulf ofMexico. Risk can also be reduced by diversification.
Another issue is liquidity. You may hold a solid asset but cannot turn it quickly
into cash. This makes it risky since if you run out of cash you are insolvent!
So which assets are considered low or high risk?

Many factors come into play but as a general guide I would suggest thefollowing:
No risk: There is no asset in this category! Banks have been known to go underand even government guarantees are only as good as the finances of therespective government. Keeping money under the mattress is not the answer
either!
Very low risk: Several deposits in more than one currency in government,
large private or international banks. But keep in mind that holding cash for thelong term is a risk in itself, since it will lose its purchasing power over time.
Low risk: Just one or two deposits as above.
Fairly low risk: Government bonds. Basically safe, since governments canalways print money to meet their obligations. Capital values can however riseor fall during the life of a bond and there is also currency risk. This is whyweaker currencies will generally offer higher returns. When investors arelooking for a safe haven they will often buy US Treasury bonds even though
they are currently paying less than 2% per annum over 10 years.
Low to medium risk: Corporate bonds as long as you invest in a range ofcompanies since a single company could default.
Medium risk: Major market equities (shares) held for the long term. Investingin mutual funds in this category reduces risk through the variety of shares held.
Land and property for the long term. Just remember you cannot sell abathroom if you need cash in a hurry!
High risk: Emerging market equities, commodities, futures, private equity.
Very high risk: Complex investment vehicles such as derivatives. This is thewhere traders at JP Morgan Chase have just lost the bank $2 billion. The bankis big enough to withstand the shock but you and I don’t belong in this area!
Variable risk: Some asset classes are less easy to classify. Hedge fundstrategies for example can range from low risk to very high risk. Banks often
issue ‘structured products’. On the surface these are safe because the capital isguaranteed but your money can be locked in for up to five years and theguarantee is only as good as the bank that provides it. Thousands of investors

were losers when Lehman Brothers went under. There are a number of very
good asset classes such as student accommodation, forestry, litigation funding
etc. They all have the potential to produce double digit returns but also share
the risk of liquidity. You should not invest in these if you think you may need
your capital returned in a hurry.
Conclusion
Anyone who cannot afford to lose even a part of their capital should not
venture beyond the lowest levels of risk. But for those who have ample cash
reserves and wish to build up their wealth a degree of risk-taking is essential.
There is no harm in taking risks so long as they are properly managed. This
usually boils down to holding a blend of assets of various risk ratings, a highdegree of diversification and a commitment to medium or long term investing.
Sometimes there will be losses but, as they say, there is no gain without pain.
And life without risk can be boring. Enjoy your next sky-dive!
Colin Bloodworth

PPI Indonesia