Understanding investment risk using everyday examples
We always hear about the rewards of investing but people don't often talk about the risks involved. Sometimes it's because they just don't know how to measure them or manage them. Other times it's because they don't want to talk to you about it because they are trying to sell you something.
But here is the truth - there is ALWAYS SOME DEGREE OF RISK.
Should that stop you investing? NO! There is risk in EVERYTHING.
But, risk, properly managed and carefully considered can be your friend because it will open you up to opportunities that others will pass up.
Let me explain what I mean and how I consider risk in my personal investing.
Ultimately, every day you face huge risks but you don't think about it. You trust total strangers with your life and you don't even know it.
You drive through a green light, trusting that the other car will obey the red light in front of it.
You get in a taxi because you trust the driver hasn't drunk a bottle of vodka - but how do you know?
You get on a plane because you assume it will take off and land without incident.
And you trust your financial future to someone else often times because they are a 'professional'.
Now i'm not saying that you shouldn't trust anyone, but i am saying you SHOULD mitigate or reduce those risks.
Let's think about the above examples:
When i drive through a green light, I look ahead at the intersection just in case someone is rushing through - i'll have time to react. I also choose to drive a safe car with a good crash rating. Does it stop an accident? No, but it can help reduce the severity.
With taxi drivers, you can talk to them when you get in, and not mindlessly go on your phone. You can also speak up or get out at the first sign of bad driving - even if you feel uncomfortable or don't want to offend them. If i'm worried for my life, your offence isn't my top priority - I won't be rude but i also won't risk it.
I can choose to fly with an airline that has a good track safety record and so on.
As with most things, informing yourself, being deliberate and and knowing what you are getting yourself into will ensure you properly manage risk.
In the next article, I will explain how I do this exact thing when investing in property - click here to read it.