BATTLING RISKS

DEMYSTIFYING RISKS-TAKING
ABILITY AND KNOW HOW MUCH
CAN YOU TAKE

ED BY
POWER

GETAI
PRINCI
PLE

ZEBRA LEARN
RISK
INTRODUCTION
The next element of RRTTLLU principle is risk. Return
goals and risk are the two most important MF
components of the RRTTLLU principle and the entire

RISK
lazy financial canvas. First, let us understand what we
mean by risk? Risk is simply the degree of uncertainty
based on our decisions. Here, we are talking about GOLD
risks from the financial point of view and it talks about
the degree of uncertainty of the outcome. Higher the FD
uncertainty, higher is the risk. It refers to the times we
UNCERTAINTY
cannot predict the outcome.

FIXED DEPOSIT GOLD MUTUAL FUNDS

Low Uncertainty Moderate Uncertainty High Uncertainty

Low Risk Moderate Risk High Risk

Moreover, risk is relative. This means that one asset is more or less risky in relation to other
assets. In itself, we can’t judge riskiness. We evaluate risk in comparison with other asset
classes.

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HOW TO THINK ABOUT RISK?
Risks need not always have a negative outcome or impact. Without taking risks, we cannot get
meaningful returns. Assets that give higher returns have higher risks attached to them. We
cannot play it too safe and expect to meet all our financial goals. The very definition of
investing is – “Reward for Risk Undertaken”. Hence, higher the risk, higher is the reward. This
does not imply that we start making rash decisions or baseless risks to earn higher returns as
that will blow up our entire Lazy Financial Plan.

The critical thing to do here is balance risk and return. We evaluate how much risk we can
take based on our profile and secondly, how much risk we are willing to take. Remember, too
much risk and our plan may not survive long term. And too little risk, we may not end up
meeting our financial goals, which is an even bigger risk.

RISK TAKING ABILITY RISK TAKING WILLINGNESS

it is the degree of risk that one can take the degree of risk that one is actually
based on their current financial
circumstances i.e. assests, income, comfortable with irrespective of the
expenses, etc. financial circumstances.

RISK RETURN

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 RISK TAKING ABILITY
GOALS Our risk-taking ability, willingness and return
goals will together help us achieve the risk-return
balance that is needed. We already are aware of
our return goals. We will now evaluate and profile
EXPENSES ourselves based on our risk-taking ability and
willingness one by one.

Evaluating risk-taking ability is a very subjective

process. Most people evaluate it based on their
biases. However, using the G.E.T.A.I. principle, we

G.E.T.A.I.
will try to make it as objective as possible. It is a
set of factors that together evaluates our risk-
TIME
PRINCIPLE
taking ability. GETAI stands for Goals, Expenses,
Time, Assets and Income.

ASSETS

GOALS
It stands for the financial goals that we
discussed a little while ago. We had listed
INCOME
down all the goals, prioritized them, quantified
them and judged its flexibility. Now we will use
two factors – flexibility and importance of the
goal to evaluate risk-taking ability.

HOW FLEXIBLE IS YOUR GOAL? HOW IMPORTANT IS THAT GOAL?

The more flexible our goal is in terms of The more important the goal is to us,
amount and time, the higher is our risk- lesser are the chances we would want to
taking ability. If we have high flexibility, we take and therefore lower will be our risk-
still have room to meet our flexible goals taking ability. When the goals are less
even if things do not go as per the plan. important, we can take risks and try to
We can either do it with a lower amount or earn higher returns that will
else by delaying the requirement for a compensate for less flexible and more
while. important goals.

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 EXPENSES
We will go back to our income statement that
we had created and get our expenses from
there. Following are the questions we need to
answer.

WHAT IS INCOME CUSHION YOU HAVE?
We will check from the personal income
statement and estimate what percentage
of our income do we spend. If we have to
spend 80-90% of our income that means
our income cushion is very thin and our
risk-taking ability is very low. As our
income increases or expenses are reduced
and our income cushion widens, our risk-
taking ability goes up.
HOW MANY PEOPLE DEPEND ON YOU?
Evaluate the number of people who
depend on us for their expenses. This is
important because when we take risks,
we also take risks for them. So, the
higher the number of dependents, the
lesser is our risk-taking ability. If we are
the sole earning member in the family,
our risk-taking ability goes down.

TIME
Time is where we talk about the period we
have for each of our goals and how flexible
they are. The questions to be looked into are:

HOW MUCH TIME DO WE HAVE TO MEET EACH GOAL? HOW FLEXIBLE ARE YOUR
Some goals are to be met in 2-3 years, others in 5 years GOALS IN TERMS OF TIME?
and the rest in 15 years. Longer the time horizon to We have already seen,
meet goals, greater is our ability to take risks. As our higher the flexibility of our
timeline increases, our ability to deal with uncertainty goals, higher is our risk-
increases. If a goal is to be met in 1 year, we have to taking ability. It assures us
approach it safely as we do not have time to deal with that we can shift the
uncertainty. However, if a goal is to be met in 10 years, timeline by a few years if
even if things do not go as per the plan for 2 years, we need be.
would still have time to recover.

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 ASSETS
Here, we do not focus on how much we own,
but on the liquidity of our assets and how thick
our support system is using assets. The
questions to be answered are:

ARE YOUR ASSETS LIQUID? HOW MUCH OF YOUR TOTAL ASSETS IS

Liquidity of assets refers to the time taken
to convert our asset into cash (if we want
to). Gold or FD can be converted to cash
overnight. However, an ancestral land will
take 1-2 years if we wanted to sell it. Easily
convertible assets are liquid assets and
those that take time are illiquid assets.
Higher the liquidity, higher is the risk-
taking ability.
SUPPORT ASSETS?
Refer the personal balance sheet and see
what percentage of total assets is under
support assets. Higher the support assets
ratio, greater is our risk-taking ability.
However, we must balance it with the size
of the investible portfolio too. If it is too
small in absolute terms, we might not end
up meeting our financial goals.

INCOME
INCOME
Using this parameter, we establish the stability
of our income and also whether we are more
dependent on income or assets. The questions
to be dealt with are:

HOW STABLE IS YOUR INCOME? WHAT IS SIZE OF YOUR INCOME WITH

RESPECT TO TOTAL ASSETS
Some people have stable government
Find out the percentage of our total
jobs, some have startup jobs, some have
income to our total assets. If we earn Rs.10
commission-based income and others
lac annually, and own assets worth Rs.1
may run a business. We need to evaluate
crore i.e. 10% income ratio, then we have
if our income is stable i.e. predictable or
enough assets for our survival. At the
variable where some years we earn
same time if we only had assets worth Rs.
exceptionally well and others, not so
20 lac i.e. 50% income ratio, then we
much. Stable income increases our risk-
depend more on income. Higher the
taking ability whereas unstable income
income ratio, higher is the dependence on
reduces risk-taking ability.
income, and lower is the risk-taking ability.

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We have covered all the five elements of
HIGH RISK
the G.E.T.A.I. principle. We saw that each of
these elements has 2 questions that need TAKING ABILITY 1
to be evaluated. Putting all these together,
we can judge our risk-taking ability in a
MODERATE RISK
much more objective manner. It is natural
to get conflicting answers while evaluating TAKING ABILITY 0.5
each element. Some factors will say we
have high risk-taking ability whereas others
LOW RISK
will suggest otherwise. The cumulative is
what counts the most. TAKING ABILITY 0
We will assign a score of – 0,0.5 or 1 for each of the 5 elements, add them up and the total
score out of 5 will determine our Risk Score. For each element, we will check if risk taking
ability is low, we will assign 0, if moderate than 0.5 and if high then 1. On adding each 5
elements, if you get a total score of less than 2, you have very low Risk Taking ability, between
2 to 3.5, you get relatively moderate Risk Taking Ability, between 3.5 to 5, we get high risk
ability. We will learn in the Planning phase, how to use this Risk Taking Ability Score to decide
on assets. In the Lazy Financial Plan, estimate your risk taking ability and leave it at that. This
entire exercise should not take more than 15 minutes and do not update Risk Taking Ability
very regularly. Do it only once every year or so. Let us look at an example to understand this
better before we move forward.

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...37 years old, Mahesh Singhvi is the Head of Operations at a
Chemical Company. He lives with his wife and son. Let us
estimate his risk-taking ability. Most of his goals are important
and not very flexible. So he gets a 0 for goals. Next, his expenses
are 40% of income and his wife also earns, so he has less
financial dependants. So, he gets a 1 based on expenses. Then,
the majority of his goals need to be met in 15-20 years and are
pretty flexible at the moment. So, we assign 1 based on time.
After that, the majority of his assets are not very liquid and only
10% of his assets are in support assets. So, he gets a 0 based on
assets. Lastly, his income is pretty stable but his income is 20% of
assets currently. So we assign 0.5 based on income. In total we
get, 0 (G) + 1 (E ) +1 (T) +0 (A) +0.5 (I) = 2.5. Using the GETAI
principle, we get a risk score of 2.5 which means moderate risk-
taking ability...
RISK SCORE

1 1 1 1 1

0.5 0.5 0.5 0.5 0.5

0 0 0 0 0

GOALS EXPENSES TIME ASSETS INCOME

0 (G) + 1 (E ) +1 (T) +0 (A) +0.5 (I) = 2.5 (Moderate Risk Taking Ability)