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Well Managed Investing Risks Bring Rewards!
Risk comes from not knowing what youre doing! Warren Buffett (1930 - )
We often listen to people who hesitate to invest in the stock market because they fear risk. There are older people who fear that a stock crash could leave them destitute. There are young couples who pine for a new home but worry that an investment loss could kill their chances.
For any investor, risk is a fact of life!
Whenever an opportunity opens up for you to make an investment profit, you also face the fear of the possibility of suffering an investment loss. Even with safe kinds of investments, such as bank deposits, there is a risk that the rate you earn will not exceed the rate of inflation.
Often, these fears are rooted in a misunderstanding of what risk is. Those who understand market risks --and properly evaluate their ability to tolerate them-- can supercharge their investment portfolios by embracing a certain amount of uncertainty!
In the financial world, risk translates to uncertainty and its measured by standard deviation from the norm.
Many individuals would say the riskier investment is the first, because their principal would be in greater jeopardy. But to professionals, the first investment is merely stupid --not risky--because its a sure thing to lose!
Still, what worries many is that you never know when the stock market is going to dive. What if it falls right before you need to sell
Most individuals measure risk as their chance of loss, but we measure risk by the variability of returns!
In other words, because stocks have higher average returns, you can suffer some losses and still end up vastly ahead over the long run.
Theres only one situation in which adding stocks to your portfolio doesnt make sense--when you dont have time to let the market work for you.
In any given year, you have about a 1 in 4 chance of taking a loss in the stock market. If one year or less is as long as you plan to invest, stocks boil down to a gamble.
But if your time horizon is five years or more, theres a very good chance that putting at least a portion of your money in stocks will boost the performance of your investments!
One question you have to resolve is the kind of investment risk youre comfortable taking. The choice ranges from conservative to aggressive, with a broad middle ground between the extremes.
Conservative Investing: Means putting money where theres little risk to principal.
Moderate Investing: Means taking risks by putting money into growth stocks and bonds.
Aggressive or Speculative Investing: Means taking a possible risk of losing part of your investment in exchange for the possibility of making a larger profit.
The ideal risk equalizer is that you should work for balance among the various risk categories.
One of your concerns should also be that if you invest too conservatively, you wont have enough money down the road to afford your goals even if youve been diligent in following your plan.
Another concern is that by taking too many chances you risk losing too much of your capital.
Ioannis - Evangelos C. Haramis was born in Greece in 1951 and he studied in Greece, USA and in Belgium. He has been active in the stock markets since 1972. Since 2002 he is New Business Development Managing Director at an Investment Bank and the editor of
Copyright 2005 I.E.C. Haramis
Useful Tips on Investing
Here are some useful tips on investing. When you make an investment, you are giving your money to a company or an enterprise, hoping that it will be successful and pay you back with even more money. Some investments make money, and some dont.
You can potentially make money in an investment if:
The company performs better than its competitors.
Other investors recognize its a good company, so that when it comes time to sell your investment, others want to buy it.
The company makes profits, meaning they make enough money to pay you interest for your bond, or maybe dividends on your stock.
You can lose money if:
The companys competitors are better than it is.
Consumers dont want to buy the companys products or services.
The companys officers fail at managing the business well, they spend too much money, and their expenses are larger than their profits.
Other investors that you would need to sell to think the companys stock is too expensive given its performance and future outlook.
They lie about any aspect of the business: claim past or future profits that do not exist, claim it has contracts to sell its products when it doesnt, or make up fake numbers on their finances to fool investors.
The brokers who sell the companys stock manipulate the price so that it doesnt reflect the true value of the company. After they pump up the price, these brokers dump the stock, the price falls, and investors lose their money.
For whatever reason, you have to sell your investment when the market is down.
Making any sort of investment involved a certain amount of risk so it is always wise to seek the advice of a professional before making any decisions.
You may freely reprint this article provided the authors biography remains intact:
John Mussi is the founder of Direct Online Loans who help UK homeowners find the best available loans via the website.
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