Understanding the Risks

Once you have a sense of the money you can spare for investing, you’ll need to decide just how much risk to take with those funds. Unfortunately, all too often people skip this step. They think of investing money like gambling money. Once they decide how much they’re willing to play with, they’re willing to risk it all. The second-largest tourist attraction in the world is Las Vegas. (The first, by the way, is Mecca.) And that’s no coincidence. Vegas is all about short-term thinking - the most natural way to think when it comes to money. In Vegas people roll the dice, spin a wheel, pull a handle, or play a hand, and voilà - instant gratification - win or lose! The ... [read full story]

Investment planning is almost impossible without a thorough understanding of risk. There is a risk/return trade-off. That is, the greater risk accepted, the greater must be the potential return as reward for committing one’s funds to an uncertain outcome. Generally, as the level of risk rises, the rate of return should also rise, and vice versa. By combining the investment information and trading tips below, you will virtually eliminate any risks of losing all your trading capital and should be able to make excellent profits from trading: 1. Follow the 2% Rule Never risk more than 2% of your trading capital on a single trade. Smaller accounts between $5,000 and $10,000 may have ... [read full story]

Anyone who has spent much time reading about personal finance knows the value of diversification in a portfolio. If you put all your money into just one or two investments - stocks, bonds, or anything else - you run the risk that something will go wrong and wipe out a big chunk of your nest egg. (Enron, anyone?) By spreading out your investments, you smooth out returns and lessen the effect that any one holding can have. Modern portfolio theory has shown that a diversified portfolio has a better expected return, for a given level of volatility, than a portfolio that's concentrated in just a few issues. Mutual funds offer automatic diversification, which is one reason they've become so popular. It's still a good ... [read full story]

Diversification is one of the fundamental tools in our arsenal of reducing risk and is the arguably the most important. Diversification is used in a portfolio (group) of investments in order to reduce the unsystematic risk level that was introduced previously. It is achieved by combining a series of investments together, such as those in the asset allocation table, and ensuring that the selected asset classes do not move (price movements) in the same direction. For example, if you selected to buy two different industry stocks (stocks that are in separate business areas) in a portfolio - a Coles Myer and a National Australia Bank Share - you would be diversifying your investment because Coles Myer is driven by the Retail and Food markets and the ... [read full story]

There a number of differing types of risk that can affect your investments. While some of these risks can be reduced through a number of avenues - some of them simply have to be accepted and planned for in any investment decision. On a macro (large scale) level there are two main types of risk, these are systematic risk and unsystematic risk. Systematic risk is the risk that cannot be reduced or predicted in any manner and it is almost impossible to predict or protect yourself against this type of risk. Examples of this type of risk include interest rate increases or government legislation changes. The smartest way to account for this risk, is to simply acknowledge that this type of risk will occur and ... [read full story]

Once your risk tolerance, intrinsic and time value of risk have been derived you are able to use asset allocation in order to establish what are the best investments for you. Asset allocation is the process of deciding how to distribute your wealth among both different countries and asset classes for investment purposes. The asset class is comprised of securities that have similar characteristics, elements and risk-reward concepts. Below are some examples high, medium and low risk assets: The lowest level investments are comprised of smallest amount of risk and volatility and therefore represent capital stable income-producing investments. While they don't offer a large return - the return on this asset class is practically guaranteed. This area is typically for the more conservative investor and would represent ... [read full story]

Risk is composed of a two values - an intrinsic value and a time value. The intrinsic value is the amount of money that you have available to invest - the more money you have, the more risk you are able to absorb. This is a relativity concept that is motivated by being able to accept a greater level of loss when a larger monetary base is available. For example, compare the loss of an investment of $10,000 to someone that has $1,000,000 in cash against someone that has only $50,000. Clearly, the person with more money is less affected by the loss of the investment than the person with less money. This is because the person with the higher capital base (the assets they own) ... [read full story]

Put simply this concept tests the fundamental reasoning behind each individuals investments - Do you know what your personal risk tolerance is? Or the degree to which you will accept a certain level of risk for a given level of return. The risk-reward concept states that while your investment decision can reap fantastic profits, you must be willing to accept a loss if it doesn't. This is the fundamental reasoning behind ensuring you know you own personal risk tolerance - the degree to which you will accept a certain level of risk. When choosing investments to spend your money on, the risk tolerance is critical to guaranteeing that you don't enter investments that are beyond your range of financial comfort. Realizing that some risk must be adopted ... [read full story]

Like anything in life - to every positive there is always a negative no matter what the situation is, or the circumstances are. The best investment advice that you can ever receive is that it is never unintelligent to be overly cautious - after-all, you are dealing with your own money and want to ensure that you get a good return for sacrificing it. The element of chance in investing is referred to as the risk of investing and it is essentially the deviation away from your original investment expectations. Risk can be assessed both objectively and subjectively and it is the difference between the two that creates the risk-reward concept. Anytime that you decide to adopt an investment, there is a chance that you may ... [read full story]