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  • Writer's pictureAdarsh Shyamsundar

Risk and Investments

In the financial world almost everything we do is tied to risk management. A common way to view risk in investments is based on the "safety" of an asset. This is typically depicted by a picture like below. The anticipated return, or appreciation of capital is higher up the pyramid.




While useful, the pyramid would be a very limited way to view risk as it pertains to estimating the best allocation of capital. It would be important to consider the timelines, interest rates and inflation into the picture.

For example, a 25 year old, holding a 10 year note at ~2% (March 2022)with inflation at 7% is essentially losing 5% of their money. While it is true that the treasury note is backed by the U.S. government, it is still not financially prudent for this person to hold a big chunk of their earning in this vehicle. On the flip side, while stocks and commodities are at the higher end of the risk spectrum, historically, they have been a good hedge against high inflation.


Let us get into a more nuanced discussion on risk. Many times, we hear conversations around stock prices and judging risk purely based on price movements. Let us take a look at the below numbers, these are the high and low for the year for a stock from the year 2014 through 2021 (source CFRA report). Based on the numbers below, would you call this stock risky?


The data above is for Alphabet (the parent company of Google). Alphabet had a revenue of $250B in 2021 and holds $140B in cash on its balance sheet, yes, that's Billions. Evaluating risks of an investment simply by price volatility would have led to missing out on one of the greatest companies on this planet. Worst yet, taking actions based on fear vs. objectivity of the investment can be detrimental to one's financial health. So, when it comes to risk it is important to know thy investment and know thyself!


Disclosure:

This blog was written by Adarsh Shyamsundar, Owner & Financial Advisor, Polaris Capital Management, LLC, a Financial Advisory firm based out of El Dorado Hills, California. No part of this blog should be treated as financial advice. Please refer to a financial advisor/fiduciary for any actions regarding investing on any equities mentioned in this article. Adarsh Shyamsundar and/or Polaris Capital Management have positions in the securities mentioned in this article.




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