Risk, a precondition for return

Attended a symposium sometime back and one of the speakers, Gabriele Vincenzo explained the concept of risk that stuck with me. That is, risk as a precondition for return rather than an undesirable by-product of return. All in all, the key is to ensure that the risk is ‘Intended Understood Quantified & Compensated’.

While commuting this morning I also thought of the two most unintended risks that people take. Inflation & cash flow risk (or liquidity risk). These are typically the factors that result in missed opportunity or pushes people to make suboptimal decisions; or being unable to make any decision at all.

Inflation is a risk that is understood by most but not compensated unless we actively plan for it. To put things into perspective, I’m gonna use my fav example: If you have $1000 today, you can buy 333 plates of chicken rice. In 20 years time and assuming inflation to be 3%, you will only be able to afford 185 plates.

So… if we see risk as a precondition of return, I would say that inflation is an unworthy risk to be taking..

Time for work.. More on cash flow risks later. 😉