Understanding Risks
Risk is unavoidable and a natural element of any form of investment. It is believed by many financial experts that when high risks are involved, there are great potential returns accompanied. The investor has to analyze his comfort zone and then plan his investment portfolio.
The investor can reduce some part of the risk involved, by proper combination of stocks, bonds and other instruments.The investor should be ready to digest the risk involved, and understand the relationship between rewards and the risks involved. Comparing the potential gain with the risk is a key to obtain good returns.As investment and risk are two sides of the same coin, it is vital to judge the amount of tolerance and avoid exceeding it. Some risks are uncontrollable and some can only be guarded but cannot be eliminated completely. Stocks investment is highly risky than bonds, which can be managed in an acceptable level.
Here are the 4 types of risks involved:
Economic Risks:
This risk depends on the economy which could go down for many reasons for example, 2000 market burst and 2001 terrorist’s attack; which impacted the economy severely. To recover 9/11 attack, it took several years and later, the economy again dipped down in 2008-2009.
For naive investors, it is advisable to understand the market downturns and promote the investments to strong companies which would have a potential to sustain in volatile market. Foreign stocks can bring good returns once proper research is done, as many US companies earn their profits overseas.
Old investor, who is nearing retirement or maturity, economic risk could be far devastating for him. The best solution is to be cautious and turn the capital into bonds and fixed income instruments whenever necessary.
Inflation:
The rise in prices of general items and services is referred to as inflation, which is a tax on everyone. It is believed to be controllable, but historically, some investors had to retreat real estate, gold and silver investments to fight inflation. It also affects the fix income of an investor as it erodes the constant source of income. Stocks are the best investments to survive inflation as company adjusts their inflation prices and rate accordingly. During recession era, stocks might struggle for some time but it will regain higher prices as the economy inclines. Investing on stocks is not a perfect solution but even a retired person can invest partially in stocks, to sustain inflation.
Market Value Risk:
It is the risk that conflicts with the investment strategy applied by the investor, but the market goes off leaving behind many good companies. It also collapses good as well as bad stocks. Whenever the market dips down, some of the investors find it fruitful to reinvest in the market, as the stocks and instruments can be purchased at lower prices as some of them have great potential to grow fast.
Too conservative:
Being cautious while investing is good, but in market strategies, being too cautious and conservative might be risky than the actual risk involved in the investment. Every investment has to be accepted with risk for good yield. For example, if an investor has fund available for 15-20 years and if he keeps it in savings account, it will not give him good returns over that duration; instead stocks and bonds can offer him very good returns over that time.
As there are risks involved with every investment, it is always advisable to spread the investment options so that any particular dip will balance the overall investment.