 |
The Proper Steps To Managing RiskInvesting money requires that you take risks. Managing risk becomes one of the biggest factors when you are learning to manage money. You need to figure out what type of risk taker you are, and make decisions accordingly. In order to properly avoid high-risk investments, you will need to learn to diversify them. First lets discuss the different kinds of investment risk: * Business Risk - These risks make you ask these types of questions: "Will this business still be a business in 5 years?" "Does this business have a marketable product?" * Financial Risk - These risk are associated with the finances of the company you are investing in. You don't want to buy the next Enron. * Interest Rate Risk - These risks involve how interest rates can change and affect the status of your investments. * Market Risk - These risks pertain to the fact that different markets can crash due to certain economic, political or social factors. You have to understand that any of your investments can crash at any time.
The type of risk that affects an entire market is called a systematic risk. The type of risk that affects only a single business or industry is called an unsystematic risk. It is important to know the difference between the two if you are learning about managing risk. What type of Risk Taker are You?Now that you understand the different risks involved with your investments, lets talk about what type of risk taker you are. Managing risk involves knowing yourself and how much you are willing to lose in your investments. There are three main types of investors: High-risk, moderate-risk, and conservative.High Risk Investors These people are often not high-risk investors by choice. Sometimes, investors don't do their homework and understand what they are doing and end up digging themselves into deep holes. High-risk investors are usually classified as people who can live with losing a quarter of their investments value in a year. If you have a lot of money and a lot of guts, then high-risk may be for you. But if you have $5,000 and the thought of losing $1,000 makes you faint, then you definitely aren't qualified to be a high-risk investor. Moderate Risk Investors If you do your homework and you trust your instincts on buying a small piece of a speculative investment that you've been researching, then you sound like a moderate-risk investor to me. These people do not bet the farm on investments that they find. They usually will take some gambles on speculative plays, but this is OK as long as they've done their homework. If you don't mind losing up to 15% on your investments in a year, then you are probably a moderate-risk investor. Conservative Investors These are the majority of investors today. Conservative investors don't take big speculative risks. They get the chills if they lost $500 on a $10,000 investment. They research high interest rates or high return on investment so long as the investment does not eat up all their savings. They will take a blue chip stock like Google or Apple any day over a speculative value stock. If you are worried about losing 5% of your investments, then you are definitely a conservative investor.
|
