Do it yourself

Not putting all eggs in one basket is perhaps one of the oldest risk management techniques. In the financial investment parlance, this is commonly called “diversification of portfolio”. Over the years this technique has worked well for investors in managing risk. In earlier times, diversification was a rather simple exercise. This usually involved allocating money to asset categories (equity, debt, commodity, real estate, etc.) that carried divergent risk profiles. During low inflation, easy money periods equities and real estate outperformed the debt; while in high inflation tighter money periods, bonds and commodities did better. However, as the markets became more globalized, financialized, and dematerialized, the performance of various asset classes started to become more correlated. With more and more assets offering a similar risk profile diversification of portfolios started becoming a complex and complicated exercise. In the past decade, we have seen sovereign bonds carry...

The benchmark equity indices in many global markets are presently positioned close to their all-time high levels. The equity shares of new age companies, with relatively untested business models, are commanding prices, which could be termed “obnoxious” from the view point of conventional valuation methods. The global debt yields are staying obdurately low, despite higher inflationary expectations and liquidity contraction talks. The market value of cryptocurrencies, one of the youngest asset classes, is also more than US$2trn. In these circumstances, “Risk” is naturally the most talked about, and understandably the most ignored, term in the financial markets. All market experts are highlighting the urgent need to manage “Risk” for investors. Investors’ survey on understanding of Risk A quick survey of household investors’ perception about the “Risk”, and their methods of managing “Risk”, however highlights that “Risk” may actually be one of the least understood, though most talke...