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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