We have all played the game, what would be the first thing you would do if you won the lottery? Not the local Vietnamese lottery, but one of the big ones from Europe or the States. A couple from the town I was born in have just been asking themselves that very same question after they won a very nice £15 million. That is VND441,554,236,425. That is a lot of 10,000 notes to stuff in your wallet. They didn’t immediately cash it in, but hid the ticket and went on a holiday they had already planned. I don’t know about you, but I would have hated every minute of that holiday, stressing that someone would have broken in to the house and stolen the ticket.
They beat the odds of 44 million to one. This is an extreme example, but to be rich like this, the odds for other ways of making it big are a lot more favourable. The Review Journal states that being an astronaut is a 12,000,000 to one chance, becoming an Olympic gold medal winner is 662,000 to one, while winning an Oscar is a 880,000 to one chance. So, with a lot of hard work, dedication and commitment, you may be able to see your sole goal in life come to fruition. Winning the lottery sounds a lot easier though.
In finance we use these games of chance and variables every day, in what is called probability, and every time you touch a financial institution’s products, whether it be deposit, or borrowing, it would have been passed and signed-off by a risk advisor and a compliance officer. For the interest rate on your mortgage, what is the chance that you will not pay it back? Bond funds, again, what is the chance that the issuer will default on payments?
There is a whole industry made on the back of studying variables and risk. Companies such as Standards and Poors, Moodys, Fitch, Equifax, Experian, Morningstar, A.M. Best, just to name a few. As an individual investor, you will need to know about them, but maybe not all the workings of them. Leave this to your investment advisor. If you are investing on your own behalf, what you can do is understand more about risk and your individual risk profile. If you are in the bracket of a conservative investor and you make a purchase of a mutual fund investing in Brazilian Factoring, you will be going against your risk profile, and therefore against your risk strategy. This increases the odds of your investments not doing what you want, or need them to do. Stick to your risk policy and do not chase returns by going against your original feelings. It is just like being left-handed and using right-handed equipment. It may work but it could be a struggle to do what you need to do. Also, if you are left-handed and you use right-handed equipment, there is a 4.4million to one chance that it will kill you.
Paul McLardie is a partner at Total Wealth Management. Contact him at Paul.firstname.lastname@example.org