Economic transactions and investment decisions are implicitly accompanied by uncertainty.
We live in an uncertain environment, where the future does not always conform to our predictions.
The risk we assume in our actions is that our forecasts are not accurate and the desired result is not triggered.
What types of risks are there?
Risks are present in any activity.
If we classify the risks according to their nature, we can distinguish between:
- – Economic Risks
- – Financial
- – Environmental
- - Politicians
- – Legal
When we assess our performance in the market, we focus on Economic and Financial Risks, without paying as much attention to Environmental Risks, the probability of which is uncertain and is calculated based on estimates of their recurrence time.
There is a widespread belief that the future is a simple prolongation of the trends that represent our present, following a more or less predictable scheme, which excludes low-probability but high-impact factors.
Within this last category would be the COVID-19 pandemic, which has destabilized the economy worldwide.
It is true that not all sectors have been equally affected, and we still do not know the definitive impact that it will achieve.
According to a study recently published by CESCE, the activities most affected by the health pandemic will be tourism, non-food retail, automotive, textiles and clothing, durable consumer goods, and leisure and cultural activities.
On the opposite side are the information technology and telecommunications, food, financial services, energy and pharmaceutical sectors.
How can we mitigate risk in our financial decisions?
This widespread impact on the economy leads us to compile some risk management tips to help us mitigate adverse situations that may affect our financial decisions:
Planning. Before investing, it is important to establish objectives and strategies to achieve them, assessing all the advantages and disadvantages of existing investments in the market.
Decision making ability. You have to know how to detect and take advantage of the opportunities that arise, acting quickly and without postponing the decisions that we see clearly, without losing sight of their risks and consequences.
Training. Knowing the subject is essential for success in any area of business and investment, otherwise, you should rely on experts to advise you on your decisions.
Diversification. A fundamental investment strategy is to bet on several products avoiding portfolio concentration, in order to minimize the consequences if there is a significant loss of value in any of them.
Be patient. Investments must be proportional to the saving capacity, under no circumstances must they exceed individual capacities. It is important to have the capacity to wait until the desired result is achieved, being able to dispense with the resources invested in the short term.
The importance of good risk management
The return-risk binomial is associated with the uncertainty of future behavior in any investment. There is no investment without risk, however, some products involve more risk than others.
Learning to manage risk and uncertainty are essential to achieve success in our investment. Although there is no exact science, the skills and personal and professional characteristics of the investor can positively influence the desired results.
To conclude, I consider it interesting to mention a phrase from the economist Félix Campoverde Vélez, closely linked to the implicit risk in our financial decisions:
“The risk in itself is not bad; what is bad is that the risk is mismanaged, misinterpreted, miscalculated or misunderstood.”
