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  • Writer's pictureIshfaaq Peerally

How much risk are you willing to take?

"The biggest risk is not taking any risk... In a world that changing really quickly, the only strategy that is guaranteed to fail is not taking risks." - Mark Zuckerberg

Risk has large part to play in life

A few days ago I wrote a post on eToro about why investing in Ripple was a bad idea. Ripple is one of the largest cryptocurrencies and have gained over 33 000 % last year. Basically, I saw Ripple as a bubble in a bubble(Bitcoin gained ONLY about 2000%) and I already gave my warnings concerning cryptocurrencies. Since I wrote this post, Ripple gained over 60%. This is not going to make me change my opinion about Ripple or any other cryptocurrencies but it has made me reevaluate my risk tolerance. A year ago, if I knew the great possibilities of Ripple I would have invested just like I invested in Bitcoin and Ethereum but not right now, in the middle of a bubble. Should you stay away from Ripple? It all depends on your risk tolerance. Not just in investing or in business but in every aspects of life, the amount of risk that you are willing to take is an important factor in determining your future success.

In establishing your risk tolerance you should ask yourself three questions? 1. How much can be gained?

2. How much time and energy am I going to invest?

3. What are the possibilities and probabilities of defeat?

1. How much can be gained?

There are people who sold all their possessions, took loans and even mortgaged their houses to invest in Bitcoin. There's indeed much risk involved but what pushes these people to make such drastic investments? It is the high gains involved. If Bitcoin gains 2000% again this year, these people are going to be very rich (Bitcoin with another 2000% gained will be worth 300 000 USD and a market cap surpassing the German nominal GDP). This ability for human beings to forecast gains and act accordingly is a great evolutionary advantage. When our ancestors left the plains of Africa for the colder northern climates it was a big risk that they were taking but they knew that the reward would be big. The climate in Africa was drying, they had to fight other tribes to survive, and new territories were most welcomed. In fact, it is engraved in our DNA that taking bigger risks may lead to bigger rewards. However, I'll dare to say that most of the times people only ask themselves only this first question before taking risks and forget the other two.

2. How much time and energy am I going to invest?

If the main stock exchanges around the world are always gaining in value, why is it then that most investors are losing money in the stock market? The answer is because they never considered the time and energy involved before starting to invest. The most risk free approach to investing is passive investing: investing half of your money in bonds and the other half in an ETF that follows the S&P 500 index. You don't need to know anything about investing and you can expect a return of about 8% every year. If you can dedicate some more time, then the next best thing to do is to start picking stocks. Again, you can look for stocks with higher risks for a higher return expectation(and also a higher loss expectation). I have enough time to look for stocks. I usually spend eight hours every week just analysing stocks which are in my portfolio and looking for new investment opportunities. I have a spreadsheet with all the important figures written and an investment diary where I can mark any important news about a certain stock. I usually study a stock for months before eventually investing in it. There are other possibilities for higher returns such as forex trading or trading penny stocks but I don't have the time at the moment to trade these and I don't have the energy too. When I first started trading I opened some leveraged trades but I had to check my phone every now and then to see if it was the right time to close or not. I eventually realised that I could instead consacrate this time into my other projects where I can find some more fulfillment.

Thomas Edison famously said that he found 10 000 ways that wouldn't work before inventing the light bulb. If you're really dedicated to your work and you are fulfilled with it like Thomas Edison did with his then you should go ahead and invest all the time and energy that you can. If you take some risks and you dedicate yourself to it, you will certainly gain something. Maybe it will not be successful but you'll gain experience. Bill Gates dropped out from Harvard because he knew that he had a great project which needed his full attention. Yes! You can take big risks! but you need to invest your time and energy in it. I wanted to work with Tim Sykes and trade penny stocks but the amount of time that I needed to invest in it did not suit me and I decided that it was not for me(at least for the moment) and he accepts only hardworking and dedicated students.

3. What are the possibilities and probabilities of defeat?

During the Second Boer War(1899-1902), Arthur Balfour, then prime minister of The United Kingdom, asked Queen Victoria what shall they do in case of defeat. She answered that she was not interested in the possibilities of defeat because they did not exist. Although some will claim that this war marked the beginning of the end of the British Empire, she was confident in victory because she knew that even if the Orange Free State and the Republic of South Africa was giving much troubles to the British forces, she could always bring more soldiers from the colonies to defend the interests of the empire. The British eventually won the war with over 500 000 men compared to the 50 000 of the two republics.

Before taking any risk you should consider the possibilities of defeat and make sure that they are nonexistent if you can. When I first invested in cryptocurrencies, I knew that it was a huge risk that I was taking and I decided to invest only 10% of my portfolio. The worst that could happen was that I lose 10% of my portfolio. It was a risk I was ready to take because I knew that I had the other 90% of my investments to back me just like the British had soldiers from the colonies to back them. It was a risk worth taking.

Looking at the bigger picture

In 2017, I made investment returns of 120% (mostly from my investments in cryptocurrencies) and of course I would love to have such returns every year but I cannot rely only on cryptocurrencies for this or only on my investments and payments from eToro for that matter. I have, therefore, decided to look for new opportunities to grow my personal wealth, that is, to find some new streams of income. After considering some options I looked at the target that I am hoping to achieve(How much can be gained?) and then the amount of time and energy that I need to invest and eventually how much I need as initial investments such that even if I lose everything, I'll still have something to back me (What are the possibilities and probabilities of defeat?)

Taking risks is part of life and most of the time we are wrong at analysing risks. How many times have you been worried in a plane when it takes off? Were you worried the last time you ate something sweet? If you live in the developed world (if you're reading this, you most probably are) then the probability of you dying from diabetes is a lot higher than the probability of you dying from a plane crash. There was not a single civilian plane crash on Earth in 2017 while 12% of deaths in the US were related to diabetes. Not just in business or investing but every time you are going to take some risk in your life, make sure you analyse them before to maximize your possibilities of success. But if you don't take any risk then you can be guaranteed of failure.

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