The Uncertainty of Risk in Modern Times

Economic transactions and investment decisions are inherently accompanied by uncertainty.

We live in an uncertain world, where the future does not always align with our predictions.

The risk we take in our actions lies in the possibility that our forecasts will be incorrect and the desired outcome will not materialize.

What types of risks exist?

Risks are present in any activity.
If we classify risks according to their nature, we can distinguish between:

• – Economic Risks
• – Financial
• – Environmental
• – Political
• – Legal

When we assess our performance in the market, we focus on Economic and Financial Risks, without paying as much attention to Environmental Risks, whose probability is uncertain and is calculated based on estimates of their recurrence interval.
There is a widespread belief that the future is simply an extension of the trends that define our present, following a more or less predictable pattern—a view that excludes factors with low probability but high impact.
The COVID-19 pandemic falls into this latter category, having destabilized the global economy.
It is true that not all sectors have been equally affected, and we do not yet know the full extent of the impact it will have.
According to a study recently published by CESCE, the sectors hardest hit by the health crisis will be tourism, non-food retail, the automotive industry, textiles and apparel, durable consumer goods, and leisure and cultural activities.
On the other hand, the information technology and telecommunications sectors, the food industry, financial services, the energy sector, and the pharmaceutical industry have fared better.

How can we mitigate risk in our financial decisions?

This widespread impact on the economy has led us to compile some risk management tips to help us cushion the blow of adverse situations that may affect our financial decisions:
Planning. Before investing, it is important to set goals and strategies for achieving them, while weighing all the pros and cons of the investments available on the market.
Decision-making. You must know how to identify and capitalize on opportunities as they arise, acting quickly and not postponing decisions that seem clear, while keeping their risks and consequences in mind.
Education. Understanding the subject matter is essential for success in any area of business and investing; otherwise, you’ll need to rely on experts to advise you on your decisions.
Diversification. A fundamental investment strategy is to spread your investments across various products, avoiding portfolio concentration, in order to minimize the impact if any single investment experiences a significant loss in value.
Be patient. Investments should be proportional to your savings capacity; under no circumstances should they exceed your individual means. It’s important to be able to wait until you achieve your desired outcome, while being able to do without the invested funds in the short term.

The Importance of Good Risk Management

The risk-return trade-off is linked to the uncertainty of future performance in any investment. There is no such thing as a risk-free investment; however, some products involve more risk than others.
Learning to manage risk and uncertainty is essential for achieving success in our investments. Although there is no exact science, an investor’s personal and professional skills and characteristics can positively influence the achievement of desired results.
In conclusion, I think it’s worth mentioning a quote from economist Félix Campoverde Vélez, which is closely tied to the risk inherent in our financial decisions:
“Risk in and of itself is not bad; what is bad is when risk is poorly managed, misinterpreted, miscalculated, or misunderstood.”