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.

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The information and data are as October 11, 2022 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.