Risk Comes From Not Knowing What You Are Doing

22 October 2010
By : Chiang Kian Seng

“I heard from my friends that Forex trading is risky”

“Investing in stocks is risky, better to leave my money in fixed deposits”

“I know of someone that got burnt trading in the stock market, better not take the risk”

“Isn’t Forex trading riskier than trading stocks?”, etc.

These are some of the many comments and questions we often get from our students and members of the public who attend our free seminars. The word “risk” always seems to be mentioned in the same breath with the words “investing” or “trading”.

So, let us get a handle on this word, “Risk”. What does it really mean?

Looking up the word in a dictionary, “Risk” is generally defined with regards to investing as follows:

“The quantifiable likelihood of loss or less-than-expected returns”.

In most cases, people associate risk of investing with uncertainty and volatility of the instrument that they are trading or investing in. I think the keyword here is uncertainty. It is often the lack of knowledge and skill that makes trading and investing risky and not the instrument itself.

The Risk Is Not In The Car; It Is The Driver Behind The Wheel

Take driving a car as an example, the car being analogous to the trading or investing instrument. It would be a risky situation if a person decides to drive a car without having undergone any form of training. It is the person’s lack of knowledge and skill that makes the situation risky and not the car. Similarly, if someone wants to trade or invest in a particular instrument but has not undergone any form of training, this person would be assuming a higher risk, and it has nothing to do with the instrument.

To be a good investor and trader, one must first seek knowledge about the instrument that one is going to trade or invest in. It is similar to taking on a new job. First, you must learn what your new role is all about, what kind of tools are there to help you in your everyday routines, what are the skill sets needed to perform your new job properly, etc. After that, once you have acquired the knowledge and learnt the skills required, you still need a period of constant practice to apply your newly acquired knowledge and hone your new skills. It is only after having practised for a sustained period of time before one is able to get the “feel” of the job and perhaps do it with ease and confidence.

Risk Can Be Alleviated With Proper Education & Experience

This is the same process that you must commit to undertake when you decide to invest in any market. First and foremost, you must get yourself educated. It is strange that most parents would not think twice to pay high school fees to send their kids to university, when there is no real guarantee that they will succeed in life after getting their degree. However, when it comes to paying for financial education, where there is a chance they can lose all of the kids’ education funds, many people shy away because of the price. Instead, they would rather risk their hard earned money in a market or instrument that they have little knowledge of, or worse, investing based on rumours or tips from various unverified sources.

Most people are attracted by the myth of quick, easy money from investing or trading but fail to understand that it takes a lot of hard work to be successful. Everyone equates being a doctor or lawyer to earning lots of money. But it is also common understanding that to be a doctor or a lawyer requires one to put in many years of education and practice before one can be successful. Ask anyone about his or her current job and you would most likely get the same response that hard work is the norm. How then can it be different for investing and trading?

“Risk Comes From Not Knowing What You Are Doing” - the title of this article, is also a famous quote from arguably the most prolific investor in history, Warren Buffett. It sounds simplistic, but it epitomises the real meaning of the word “Risk”. Any instrument, be it stocks or forex will be dangerous if you don’t know what you are doing. It is not the instrument but the level of the investor’s understanding of the instrument and the market that determines his risk level. So, do yourself a favour, invest in your financial education before you invest in the markets. I leave you with another quote from Mr. Buffett: “The most important investment you can make is in yourself”.

Chiang Kian Seng, Trainer at FXDS Learning Group Pte Ltd, has more than 3000 hours of experience in trading and investing in Stocks, Forex and CFDs. To learn more about FXDS Learning Group and the financial education courses they offer, please go to www.fxdsgroup.com.