Risk is a probability that something can happen
In order to come up with a slightly different definition of risk that better suits our investing purposes, we need to look at what do we actually mean by “something” and “probability”? So let’s analyze this definition to better grasp the meaning of risk in context of investing.
hat is referred to as “something” is either directly mentioned or implied when we talk about the risk. Here are few examples to make this clearer:
- Risk of an accident (we “directly mention” accident, but we “imply” loss of life or material losses)
- Risk of fire (we “directly mention” fire, but we “imply” loss of property or anything else that can burn away and value can be lost)
- Risk of losing (we “directly mention” losing i.e. losses, but we “imply” loss of value or possession)
- Investing risk (here we do not “directly mention” what is at loss, but we “imply” losing the investing capital or portion of its value)
As you can see, there is a common theme for all these risk statements – loss. In general, risk implies unwanted outcome or something negative in its nature. More specifically, risk represents probability of losing something.
As risk is associated with probability of negative outcome, we never use it in a positive sense. For example, we would never say: Risk of getting the profit! …unless if objective is obtaining losses, in which case profit might be an unwanted outcome. It is hard to imagine any healthy circumstances in which something like that could be desired.
To state it clearly, “something” stands for “a loss”.
robability is a mathematical term but we don’t need to be that exact in order to understand it. We can simply observe probability as a chance or likelihood of something happening. So let’s be descriptive and express how likely something can happen:
- It is impossible (=0%)
- There is a small chance (≈20%)
- There is a fair chance (∼50%)
- There is a large chance (≈80%)
- It is certain (=100%)
Thus likelihood of happening can be impossible, certain and everything else in between. Philosophically speaking nothing is impossible and nothing is certain. That pretty much means everything is in between these two extremes.
At this stage it doesn’t matter what the actual probability may be in terms of percentages. However it is important to understand that every outcome has its likelihood of happening and some are more likely while some others are less likely. Thus when it comes to probability we always think in relative terms: we assume certain outcome as a reference and express every other outcome as more or less likely, or having smaller or greater probability of happening.
Again, to state it clearly, “probability” stands for “a chance”.
he original definition of risk: “Risk is a probability that something can happen”, can be adjusted to better suit our investing purposes. We refer to risk quite often and it is good to be clear what we consider by investment risk.
So we can restate the original definition of risk in a slightly simplified manner and we can specifically address investment risk:
Investment risk is a chance of losing money
Now, this is pretty simple and clear definition. Of course, our assumption is that we don’t want to lose any money. Even though we don’t want to lose money, there is always a chance that money can be lost. Investment risk represents the likelihood of that unwanted outcome happening despite our best intentions.
Since we cannot eliminate investment risk, our objective is to minimize it as much as possible. Solid Wealth Strategy is quite successful in minimizing investment risks especially in context of achieving solid investing returns.
