We do not normally think of risks until after an adverse event has occurred that has impacted us, due to normally lack of wanting to dwell on negativity. But we often hear that a failure to plan is also a plan for failure, true if we are oblivious to the forms of risks that we may not be conscious about.
I think there are three forms of risks that we do not consciously manage or are aware of. They are 1) Liquidity Risk (2) Redemption Risk and (3) Concentration Risk.
An example of Liquidity risk is if we allow ourselves to be too involved or exposed to equities that we do not leave aside spare liquidity to address life's contingencies (e.g being out of work, medical bills, divorce, other emergencies etc) which forces us to have to liquidate our equities at the time when it is weakest or at its low. If recession strikes, we lose our job and we need the cash, that could be the worse time to sell stocks.
Redemption risk occurs when we subscribe to an investment which does not allow us to redeem for cash when we need it- during the GFC, many mortgage funds which paid high interests were frozen. Some funds also have in their charter to limit redemption when fund managers deem necessary to preserve their financial position. Redemption risk also can occur when a big investor pulls out from the fund/investment causing the fund to have to sell their assets at the time when the market is weakest, cementing a permanent loss of return. This actually occurred to me with a gold fund I previously invested in many years ago, when Gold began to drop earnestly, a large investor in the gold fund made a full redemption which necessitated the fund to sell its gold equities into the gold bear market, destroying returns for all other unitholders.
Finally, concentration risk is something we can consciously avoid but is something I see rather often with retail investors. When they love something, they're all in it. The lack of diversification, and the high level of concentration in a single stock can be great if the stock is doing really well, but they often forget that it also works against them the other way around when the stock underperforms or falls significantly. Just as they could have made life changing fortune with the multi-bags on that one single stock, and probably have spent half of it through overseas holidays and lavish spending, they haven't really realised those gains, and when the proverbial hits the fan, they stand to lose them all and maybe more. They are more often than not those who average up their holdings as the stock tanks, increasing concentration risk. The other which is a more unconscious concentration risk is a situation where the investor works in the sector/industry e.g property/construction, and invest heavily in the same sector e,g property and finance and holds investment properties, so being heavily concentrated in property/construction, should recession hit the sector badly, it could result in a triple whammy hurt in lost job, equity losses and a devaluation in properties held.
Obviously, these are risks we could manage if we consciously attend to it if relevant rather than wait for when they could become a problem.
Rightly so, Risk Management is paramount in these times, if We Don't Manage Risks, Risk Would Manage Us.
