Risk
When it comes to investing, there is one thing that you are not going to navigate away and that’s the prospect of risk. No matter what kind of investment you make, there is always an element of risk. However, this concept is not just relevant in the context of investing. It’s a major part of everyday life as well.
Everything we do… every decision we make… It all involves some level of risk. It’s the natural order of life. From driving to work or walking across the street, to trying out the restaurant that looks a little iffy. The point is we can’t do away with it, but we also don’t have to hide from it either.
Imagine if you never ventured outside your home, crossed the street, or tried new foods due to the risk that comes along with it all. Most likely, you could never imagine a life like that. As the famous quote says, “the biggest risk is taking no risk at all.”
This is especially true when it comes to investing. Never getting started for fear of the risk of losing money is the surest way to never reap the rewards of a long-term investment strategy. In order to benefit from this everyday aspect of life, like everything else we do day to day, we must learn to operate in harmony with risk.
Risk can be managed and even used to our advantage — we just have to reevaluate our relationship with it. To avoid risk altogether is to miss out on all the benefits of investing, but learning to manage it will give you the confidence to invest in any environment.
For example, buying in the midst of a bear market is very risky, as the market is in a downward trend. However, if one were to employ different strategies, it could work to their benefit. But before we can understand how to manage risk, we must first understand what it is.
What Is Risk?
With regard to investing, risk is defined as the chance that an outcome or investment’s actual gains will differ from an expected outcome or return. Risk includes the possibility of losing some or all of an original investment.
Since this risk is inherent in all financial markets and investment vehicles, investors seek some kind of compensation for taking such risks. For instance, junk bond investors accept higher dividend yields in return for taking on the extra risk of the company defaulting. On the other side of the spectrum, some investors are willing to accept a smaller, more predictable return in exchange for a more stable investment with less risk. Anything to take the bite out of the risk associated with investing.
Some strategies are very “risk on” while others tend to be very risk averse — it all depends on the goals of the fund and the investor.
Your risk tolerance will ultimately depend on your temperament as an investor and will determine which strategies you use in order to match this tolerance. Risk can make investors act irrationally, so understanding it and how each investment has its own risk profile is extremely important for the longevity of your investment.
Once we have a general understanding of the risk inherent in investing, and what our risk tolerance is, we can then look for strategies that allow us to invest according to our plan.
Why Manage Risk?
One cannot really invest in “risk.” However, there are ways investors can manage their risk and invest according to their tolerance.
Investors with a larger appetite for risk can satiate this hunger by looking for innovative stocks and industries, which are often accompanied by outsized returns. There’s a catch though — whenever the market hits a rough patch, these assets are often the first to go and fall the hardest.
Similarly, investors that are bullish long term can use a pullback in prices to start their long-term buying again. The rate at which you buy back into the market is an excellent way to manage your risk. Rather than buying all at once, a risk-averse investor, who is also taking a risk by buying, can ease their way in and reduce their risk by spreading out their buying over a longer period of time.
If the mere thought of capital depreciation has you on edge, there are safer options for the long haul. For example, a risk-averse investor may look for funds that seek to invest in fixed-income and alternative fixed-income securities. What minimizes the risk is the steady income these investments generate as well as the stability they provide. But the implementation of these strategies must be tactical.
How To Get Started…
When we talk about investing, especially over the long term, we want to lower our risk as much as possible without risking too much of our potential returns. A great way to achieve both is having a healthy mix of the fixed-income provided by bonds and the risk that assets will pay off in the future.
Searching for the theme of “risk” you’ll find just how to get started with creating a balanced portfolio that’s able to withstand the risk and uncertainty that walk hand in hand with us on our investment journey.
Unlock a World of Investing
with a Magnifi Account
Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.
The information and data are as October 11, 2022 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.
Interval Funds
Oftentimes, investors are so focused on stocks and bonds that they forget about the many other methods of alternative investments. The appeal of stocks is obvious. Simple buying and selling of stock in companies that we use everyday, we get a little piece of the pie.
However, there is a vast array of investment strategies and tools out there at our disposal, perhaps many that some investors will never even know about. From different managers to different assets, these investments can be very advantageous to your financial future if you are just aware of what you’re looking for.
Interval funds are a great example. They’re an investment vehicle that many investors have probably never even heard of, let alone considered adding to their portfolio. Yet, this can be a great alternative to the traditional means of investing. Let’s explore these funds to see how they might fit into your plans for the future.
What Are Interval Funds?
Now that we have introduced a new investment concept to many of you, it is probably a good idea to take a minute and explain what exactly an “interval fund” is.
An interval fund is an example of a closed-end fund, a type of mutual fund that issues a fixed number of shares through a single initial public offering (IPO) to raise capital. Instead of trading on the secondary market, an interval fund periodically offers to buy back a percentage of outstanding shares at net asset value (NAV).
Again, these aren’t your typical investments, but they warrant investors’ attention nonetheless. The rules that come along with investing in an interval fund, as well as the asset they typically invest in, aren’t of the run-of-the-mill variety. These rules and asset classes make investment in an interval fund very illiquid, meaning the buying and selling of your position is not possible as in investing in stocks.
So what types of assets do these funds typically hold? These funds have the ability to invest in alternative types of assets, referred to above, that many investors don’t know about or don’t have interest in. These investments include commercial real estate, consumer loans, debt, and other illiquid assets, and also helps increase interval fund yields.
Which brings us to the “interval” part of the investment. Interval refers to the periodic events in which the fund purchases back its own shares.That is, the fund periodically offers to buy back a stated portion of its shares from shareholders. However, shareholders are not required to accept these offers and sell their shares back to the fund.
Why Invest In Interval Funds?
You may be asking yourself why someone would want to invest in an interval fund? Well, if you’re like most investors, you’re after the higher returns that often accompanies these investments.
Because they are invested in these illiquid, alternative investments, the fund’s performance isn’t necessarily tied to a falling stock market. Investing in things like debt and real estate presents investors with an investment strategy that can see higher yields as well as operate independent of other economic conditions.
In essence, it is another way for investors to diversify their holdings, and therefore, spread out their risk, instead of being tethered tightly to the stock market. Especially, when the market is dragging you down to its depths.
Historically, real estate does well during times of higher consumer prices over the long term. As prices of assets rise, so do property values, which also tend to have stickier prices. Moreover, consumer and corporate debt continues to increase. As it does, it’s a good idea to be on the receiving end of any interest income that could be generated.
However, there are some other pros outside of just chasing the higher returns. Not only are these investments often less volatile and market reactive (since investments are not tied to equities), they also grant retail investors access to institutional-grade alternative investments with relatively low minimums.
You may be looking at the fact that these investments being illiquid as a bad thing; however, when you consider this deters normal investor “buy high/sell low” behavior, you begin to think about this as a positive. This also reinforces the stability of the asset value. If your goal is to invest for the long term, the idea of your money being locked up in a high-yielding investment doesn’t make you sweat all that much.
How To Invest?
Like all investments, whether traditional or alternative, Magnifi makes it easy to explore and even get started investing in a range of funds, especially interval funds.
Simply searching the term “interval fund” and you will be provided with a variety of options, like those with real estate focused strategies. However, you also have the option of targeting those funds that deal with corporate lending. Both provide the promise of stability, as well as great long term investments.
Unlock a World of Investing
with a Magnifi Account
Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.
The information and data are as October 10, 2022 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.