Short answer is yes but it can also be rewarding. There are many aspects to life that can be risky, and investing can be one of them. The key to investing is being able to mitigate your risk as much as possible through educated and calculated investing.
For an investor, risk refers to the potential for financial loss. That usually revolves around how certain — or uncertain — you are about a stock. In other words, risky investing is spending your money without doing the appropriate due diligence and research. This can come in many forms from emotional trading to following the herd. Check out our article on Life After Meme Stocks .
But if you want to grow your wealth today stashing your cash under the mattress will not do, you have to be willing to take on some risk. How much is defined by your personal goals.
We highly recommend consulting with a financial investment professional to clearly understand your short and long term goals with regards to your personal investment objectives.
But we can show you the basics here…
Benefit of Risk
Generally, investing in stocks over a longer period can be a good thing. When you look at the market over the years there will up years and down years, but the tendency is to have far fewer downs than ups. For the long term this is good, and investors can realize gains that outpace more traditional holdings such bank notes or savings accounts.
For the investors who took the risk and kept their money in the stock market over the long term, the value of their investments likely increased.
There needs to be balance where you’re earning enough return to help meet your investment goals and you are comfortable with the amount of risk you’re taking.
When investing in stocks there are several risk factors that need to be considered. But here are a few that you may want to be aware of that can impact your investing decisions.
This is more of an overall systematic risk. You can think of this as the day-to-day fluctuation in the markets. For instance, the market may take a big downturn and this can pull down the price of even strong good stocks. Market risk events in the short term is higher than in the long term.
This risk comes directly from the business or company. The risk is derived from a poorly run company that is not doing well. Reasons can vary, anything from bad management, financial reporting, to poor execution or investor sentiment.
This highlights the need to research individual stock selection and ensure you are picking stocks using a well informed and educated process.
This is a factor of how solvent a company is with regards to their cash position. Companies with high depts may find it hard to pay the bills. Or this could cause actions such as a cut in dividends. Worse case a company could go bankrupt and that would deem your stock worthless.
So again research, research and more research so you know before you buy.
Interest Rate Risk
The relationship between interest rates and the stock market may be indirect but the two tend to move in opposite directions. General rule of thumb is when interest rates are lowered, it causes the stock market to go up and when interest rates go up it causes the stock market to go down.
When the interest rates are high, a company might find it difficult to borrow money. If a company does not have a high cash position this can create issues when trying to expand or even grow production.
Understanding a company’s position can help mitigate such risk.
New regulations are being proposed or introduced all the time. These regulations can greatly impact a company’s ability to perform and even hinder its ability to generate an acceptable profit margin which can directly impact stock value. For example, telecommunication, beverages, pharmaceutical and few other industries are highly regulated and should be constantly monitored for regulation changes. On the other hand, regulation changes can present opportunities to other companies. Point is the need to understand how regulations can affect the company’s profit and hence, the stock price, up or down.
As a kid I can remember walking to the corner market and buying a candy bar for 25 cents. That same candy bar is almost two dollars today. Inflation occurs when prices rise, decreasing the purchasing power of your dollars. But it is not just candy bars, it is bread, gasoline, electronics, and homes.
The impact of inflation may seem small in the short term, but over the course of years and decades, inflation can drastically erode the purchasing power of your savings.
Although, it might sound good in the short term as these industries will make money from the inflated price. However, for the long run, it might have an adverse effect on their customers. That coupled with inflation causing an increase in the price of materials, production cost or the cost to do business can be a company’s double edge sword.
To expose to hazard or danger, in this case to expose to the risk of losing your hard-earned money. Regardless there will always be some level of risk when investing in stocks. Key is to take very calculated steps to mitigate the level of danger.
How much can you take
As an investor you need to understand just how much risk you are willing to take. Where do you sit, a conservative investor, more averse to risk, or aggressive investor, more tolerant of risk. Understanding your appetite for risk can help you select investments and build a portfolio at a level of risk you’re comfortable with, while continuing to work toward your objectives.
Stick to the plan
One of the most efficient risk-management strategies is simply sticking to your plan. But make sure this includes includes your escape plan as well.
Diversification is an important concept to remember when you’re building a portfolio. By spreading your money between investments, you are balancing the volatility of riskier options with the consistency of less risky investments.
Investing can involve risk but don’t let that scare you. Once you understand your tolerance for risk and the strategies available to manage risk, you’ll be more confident in building an investment strategy right for you.
For the Good,