WHY INVESTORS SHOULD BE RISK FOCUSED INSTEAD OF RETURN

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‘Risk’ a 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, it’s nothing but the deviation between expectation and the 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 straightforward balance sheet, managers have to deal with assets, liabilities & equity to ensure profitability, efficiency & solvency. In all the matters associated with balance sheet management, the risk is associated.

Commonly risk has two aptitudes, one is an upside (known as return also) & another is a downside (pure risk). Also, the total risk can be subdivided into systematic and unsystematic risks. Unsystematic risk can be diversified through some techniques but systematic risk can’t be diversified. In business, the risk exists in both internal & external environments. Any investment carries a 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 a higher return on investment at higher risk & some of them want a moderate return on investment with a minimum risk. As we now facing global geopolitical & economic disturbances, the downside potential has become more likely with the investment held by different entities. Based on the observation of the 2007 global economic crisis, we found greedy investors engaged in trading securities at the 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 expectations. Later after the stock market crash, investors lost their numbers manifold in their profit/loss statement. To 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 an extra risk on investment exposure.

The managing risk or hedging concept introduced 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 intend to hedge over their investments lack the necessary arrangement to lock their downside potential. Investors can’t insure risk response ineffective 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 are based on published information but do not guarantee any actual risk or return to be materialized.

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