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What
You Must Know About Investing
Risks
“Risk
comes from not knowing what you're
doing.”
Important facts
-
Your
wealth is always at risk,
whether you put it in a savings
account or in the stock market.
-
The
amount of risk you take does not
determine the returns you get.
-
You
need to understand how much risk
you are able to take.
-
Risk
can be controlled and made to
work for you.
There
are 3 ways of looking at risk
-
Wall
Street sees risk as volatility
[price fluctuation].
-
Investors
think of risk as the chance they
will lose money.
-
A
third, often overlooked, way of
understanding risk is loss of purchasing
power [the risks from inflation].
Risk
factors working against investors
-
People
have a optimistic outlook and positive bias.
-
Predicting
the future is difficult at best.
-
People
have a disproportionate reaction to
risk and return.
-
If
you don't risk anything, your risk
everything.
-
If
the potential gain is believed to be
large enough,
people will take extraordinary
risks.
-
Risk
is inherent and can not be
completely eliminated.
-
Investors
must be able to tell the difference
between different kinds of risk
[short term price fluctuation vs.
permanent value impairment].
What
successful investors know about risk
-
Use
a risk averse investing style.
-
Be skeptical and wary in
their dealings with people and the
media who encourage
investing actions in which they have
personal profit motives.
-
Quantify
how
much risk is needed to
reach their investment objectives.
-
Determine
how
much risk you are able to take
before it forces you to make a
mistake.
-
There
is no free lunch, if it seems
to good to be true, it is.
-
When
you know your risk, you can
better predict your returns.
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