Money Explained: What’s The Right Risk?
The Money Awareness and Inclusion Awards
Making Money Better
What’s The Right Risk?
There was an apocryphal story about an Oxbridge professor asking a candidate to define “risk” for him, and then proceeding to open his newspaper and read it, without looking at the applicant. The story goes that the interviewee took out a cigarette lighter and set light to the newspaper, with the words “This is risk”!
You can’t do that with a vape and the news feed on your phone, now, can you?
I was reminded of this when reading one of our stories this week, based on a paper by a British think-tank saying that its economy needs more risk-taking if it is to grow faster. The UK has become too “risk-averse”. It’s actually a really interesting point and one that doesn’t get discussed enough.?
What is the right amount of risk? It’s too easy and tempting to say “none” but that’s as wrong as taking too much risk, and perhaps even worse.?
Let’s put it into a personal context. If I asked you how to assess whether an investment was risky, your reply would probably have something to do with whether or not you might lose money. It’s a typical answer, and over the short term, if you might need the money for something else, probably as right as any other.
But what about longer term money, your retirement funds, for example. Comparing that to “losing money”, which essentially means you’re benchmarking your returns against zero percent, is wrong. It means you’ll end up in fixed deposits, and the real value of your savings, compared to inflationary consumer goods or other assets, will go down. Over a long time, this can be catastrophic.?
A more appropriate “risk appetite” would be to want your assets to perform at least in line with other assets, whether that’s property or stocks or another asset class. Or better.?
But that will be hard if you don’t want those assets to ever go down in value, because they might.?
Longer term the good years should outweigh the bad, and you’ll make more in “riskier” assets, than in anything promising to be “zero risk”.?
That’s why longer-term, most of the time, you should take as much risk as the rest of the economy or market. It really is ok to think about taking on more risk, and even risk losing a little money occasionally, as that risk should be balanced by making more on other occasions.??
This is actually appropriate behaviour - unlike setting light to a professor’s newspaper.
Money 1. Britain's Economy Needs More Risk-Taking to Halt Decline…
A UK think tank has warned that Britain’s economy is at risk of long-term decline unless businesses and policymakers embrace a greater appetite for risk. The Social Market Foundation suggests that more investment in innovation, entrepreneurship, and bold policy changes are essential to reverse the economic downturn. The report highlights that a cautious approach is contributing to the country’s stagnation and argues that bold, forward-looking investments could arrest the decline.
…Explained:
Money 2: Oil Prices Ease, But Winter Heating Concerns Remain…
Oil prices dropped slightly this week, despite ongoing fears about potential supply disruptions in the Middle East due to geopolitical tensions. Investors remain wary that any conflict could affect global oil production. As colder weather approaches in the northern hemisphere, there's additional concern about the cost of fuel for heating, which could spike demand and push prices higher. While current prices are stable, the looming winter and possible supply issues keep markets on edge.
…Explained:
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Money 3: Bitcoin Falls Below $59K Due to Inflation Fears and Regulatory Crackdown…
Bitcoin's price dropped under $59,000 due to concerns about rising inflation and regulatory pressure from governments. Investors worry that inflation will push central banks to raise interest rates, which could make riskier investments like Bitcoin less attractive. Bitcoin has often been seen as a hedge against inflation because its supply is limited, unlike traditional currencies, which can be printed more. However, with increasing regulations and global economic uncertainty, many investors are rethinking their positions in the cryptocurrency market.
…Explained:
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The MAIAs Team
Better Money with the MAIAs
Seven weeks ago, the MAIAs started a new podcast, interviewing winners of the Money Awareness and Inclusion Awards. If you'd like to learn more about financial literacy and education, this is a great place to start:
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??? Clare Walker, FINCO Malaysia, Best Non-Profit Emerging Markets
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