Exponential Mindset Blog

The idea of risk

The recent spat between Vancouver Realtor Owen Bigland and CMHC head Evan Siddall has me thinking about the idea of risk. Inherently what CMHC is saying is that buying real estate right now is risky. I don’t know if that is true or not because no one has a crystal ball, but see if you have heard of this before? My background is that of an Asian family. I was always taught that cash is good and it is risk free and that investing is akin to gambling. I posted a comment on a facebook group I follow similar to the following in response to a similar comment.

The issue with saying investing is gambling is that we assume we know what a default position looks like or we know what risk looks like. For example, my parents like to hold their savings in cash or fairly liquid instruments such as gic, is that good? Is that safe? I don’t know. But what I do know is that they are taking an active position rather than a passive one which is what they assume it to be, they think they are in a default safe position. The active position that they are taking is assuming that the real value of the cash that they hold will be retained in the future. Whereas I don’t know what the future holds for my assets portfolio, similarly they have no clue what the future holds for USD or CAD (we are both inherently gambling even though it appears to the conventional eye that only one of us is). The problem with financial education is that we assume we know what the default position is which is cash. Because unless you have secured shelter for life, a fully funded retirement, have enough to put your kids through university, you are actively shorting something. A person who rents is basically shorting the future housing market whereas a person who buys is shorting the cash that he/she is borrowing. There are few certainties. It is not neccessarily correct to assume that the default position is a non debt, all cash position. What one should do is look at one’s life and figure out the near certain liabilities and look to contain those early; those liabilities are the risks that we take. And if you don’t attack those risks early, they will attack you.

So you see, everyone is taking a risk, unless you have everything, a shelter all paid for, fully funded retirement, and education fund for the little ones, you are shorting some asset, maybe that’s why we call it shorting, basically we are short of something. Whatever it is that you are short of, that is the risk that you are taking. So simply having a lot of cash but lacking the other assets means that you are taking an active position in cash and shorting the real assets; if anything the last decade should have taught us that this is a risky position to be in.

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