|
Friday, June 24, 2005
Zosa: Risk appetite
By Elbert Zosa
Biz Vantage
PROFIT AND LOSS. Banks are primarily in the business of managing risks. Business in general is about risk. Entrepreneurs invest their money in the production or delivery of products or services in order to generate a profit by meeting customer needs. Whether or not they make a profit is dependent on many factors, thus the risk that instead of a profit, losses are incurred.
The higher the risk, the bigger the incentive that is normally offered to tempt the potential investor. Thus, finance people conceived the term, “risk-reward” ratio or tradeoff, to emphasize this relationship.
Peso placements in government financial institutions that are government-guaranteed are termed risk-free. Caution: placements in foreign currency, even with government guarantees, are not risk-free since the government can default on foreign loans on a currency that they have no control over.
Some savvy major investors require that their long-term investments generate a spread or premium over the risk-free rate, e.g. the five-year fixed rate Treasury note. This spread or premium could be from three percentage points to six percentage points or more, depending on the perceived risk that losses could be the result. If the five-year note is at 10 percent, adding a four percent premium totals 14 percent.
In my personal experience, I have seen such major investors achieve their objectives—and even more, much more. Credit it to good timing, astute management, meaningful information systems, employee dedication, workforce culture, hard work, sense of urgency, good luck, prayers, what have you.
There also are investors who are deemed likely to fail from the beginning because they compete in business lacking the adequate arsenal of knowledge, hard work or good management. On the other hand, I have also seen the agony of defeat and frustration suffered by even the most intelligent and experienced investors.
Luck and timing are abstract non-predictable factors. But I have seen these elements spell the big difference.
Take one extreme about a friend who sold his investments in a large company to a foreign company. Paid in dollars, he paid off his dollar loans just before the Thais experienced the Asian financial crisis. Within a day or so, the foreign buyer might not have made the purchase or offered a much lower amount.
Passive savers also take a risk when they place their funds in a financial institution. To mitigate that risk, the Philippine Deposit Insurance Corp. insures deposits in PDIC-insured banks up to a maximum of P250,000. Within this ceiling, bad judgments about placing funds in an unstable bank is neutralized.
Savers have an array of choices from market-oriented banks, from mutual funds, the stock market or from other asset opportunities. The key is in the management of risk and your risk appetite. This is why finance experts advocate portfolio allocation for those who have significant amounts of savings. More in future columns.
(elzosa@yahoo.com)
(June 24, 2005 issue)
Write letter to the editor.Click here.
Join the Sun.Star message board.Click here. |
|
[return to top]
[home]
[network page]
|
LOCAL NEWS
BUSINESS
OPINION
SPORTS
LIFESTYLE
FEATURE
SUPERBALITA
WEEKEND
|
