What Investors Get Wrong About Risk
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05 September 2019
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One of the first steps to investing successfully is to determine your risk profile at the onset before building a portfolio Investors often do this by answering a series of questionnaire that touches on their attitudes toward risk and also net assets.

The answers would then ultimately serve as a guide to asset allocation and set the risk-return parameters in a portfolio. Hence, it is a crucial step that investors need to get right at the beginning to avoid a risk mismatch in a portfolio. But the concept of risk can be tricky terrain for investors to manoeuvre especially when psychological biases and market volatility comes into play. 

Among the most common misconception that investors have is the level of risk that they are prepared to accept and actually able to take.
 

Understanding your Risk Profile

According to Investopedia, a risk profile is an evaluation of an individual's willingness and ability to take risks. There are two parts to the equation here, i.e. willingness and ability to take risks. Investors often get confused between the two. 


The conundrum that investors face lies when one's risk tolerance and risk capacity differ from each other. Taking too much risk than what one's risk capacity allows could compromise financial security and lead to undue risk in a portfolio which is more than what the investor's personal standing can handle.

On the flipside, taking too little risk when the investor's capacity actually allows for more aggressive exposure may lead to a shortfall in reaching their financial goals. This means that the portfolio would generate lower returns and the investor may have to settle for something for lower than originally intended or even delay their life goals/plans. 

Reconciling with Risk  

Whether one has an aggressive or conservative risk profile, all investors have an aversion to loss and hate losing money. However, risk should also be defined in terms of opportunity cost by not participating in upside gain due to not having sufficient exposure. Put simply, the risk of taking too little risk. 

Understanding one's risk profile may require some form of discovery or trial-and-error. The best yardstick for investors to use is to ask themselves if they can sleep at night knowing how much wealth they have invested and confidence in their allocation.

Gradually though, investors can learn to manage risk through diversification across asset classes, sectors and regions as well as hedging (e.g. currencies) to have the best chances of success to reach their financial goals.

Sometimes, the biggest risk is not taking one.
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TENG CHEE WAI

Managing Director
Teng Chee Wai is the founder of Affin Hwang Asset Management Berhad (Affin Hwang AM). Over the past decade, he has built the Company to be the fastest growing and only independent investment management house in Malaysia’s top three, with an excess of RM47 billion in assets under management as at 31 December 2018.​

​In his capacity as Managing Director / Executive Director, Teng manages the overall business and strategic direction as well as the management of the investment team. His hands-on approach sees him actively involved in investments, product development and marketing. Teng’s critical leadership and regular participation in reviewing and assessing strategies and performance has been pivotal in allowing the Company to successfully navigate the economically turbulent decade.

Teng’s investment management experience spans more than 20 years, and his key area of expertise is in managing absolute return mandates for insurance assets and investment-linked funds in both Singapore and Malaysia. Prior to his current appointments, he was the Assistant General Manager (Investment) of Overseas Assurance Corporation (OAC) and was responsible for the investment function of the Group Overseas Assurance Corporation Ltd.​

​Teng began his career in the financial industry as an Investment Manager with NTUC Income, Singapore. He is a Bachelor of Science graduate from the National University of Singapore and has a Post-Graduate Diploma in Actuarial Studies from City University in London.
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