Risk…the possibility that something bad will happen.
To my great chagrin the financial services industry, or at least those who are not prepared to do much thinking on the subject, have no clear concept of what is “risk” and what are its degrees.
If you walk across a railroad track there is a risk that the train will run over you and you will be dead. If you walk across a rail crossing and the train is coming in your direction at 80 kilometres an hour and you stay on the track in front of the train there is no “risk” that you will be killed, there is a “certainty”.
Risk then includes the possibility that something bad will happen which clearly includes some possibility that nothing bad will happen.
Early in my career as a financial planner Macquarie Bank published a handbook which set out to characterise types of risk relating to money and investments (note the difference). I have lost my little book so I’ll try to remember the types of risk they spelled out.
Market risk. The investment you make will go down in value.
Affordability risk. The investment you make will go down in value and you are forced to sell.
Embezzlement risk. The investment you have made involves giving money to a crook and he embezzles your money.
Currency risk. You are going to Europe next week and the euro rises against the dollar.
Pickpocket risk. You withdraw $500 from the ATM and a skilled pickpocket pinches it.
Sovereign risk. Your government completely loses the plot and the currency loses its purchasing power (Germany in the 30s, Greece, Zimbabwe).
Inflation risk. All prices go up; your income doesn’t.
Profitability risk. The business you own does not sell sufficient goods and/or products to make sufficient gross profit to cover all the expenses of the business.
Technology risk. The service you sell or the goods you sell become redundant through technology. Did anyone predict what happened to Kodak? Or Blockbuster Videos?
Redundancy risk. Your job simply ceases to exist eg typesetters.
I have tried hard and without success to find a dealing with money that iscompletely risk free.