As an investor, risk is often the name of the game. A popular misconception, however, is that risk is never a good thing – and that it should be avoided at all costs. That’s not necessarily true – and, in fact, risk can be used to your advantage as an investor. Without risk, there’s no reward! This article will explain what risk really is in an investment context, and how it can be managed properly with a decent risk management strategy.
Understand it properly
In the eyes of many people, risk is seen as something to be avoided. To some extent, it’s easy to see why this perception exists. However, risk is an inevitable part of investing, and it’s something to be managed rather than avoided. The most successful investors don’t avoid risk: they just manage it in the ways outlined below.
Time and risk
As the expression goes, “time is a great healer” – and nowhere is this more true than in some investment markets. From a stock market tracker to a house, lots of assets find themselves losing value in the short term and regaining it in five, ten or more years – so if you can invest for the long term, you’ll be more likely to see success. Not all assets recover their value, of course. However, for those assets, mitigating that risk with knowledge – as below – is a smart move.
Knowledge and risk
On that note, it’s also worth ensuring that you have as much knowledge as possible as a way of mitigating the risk of scams and fraud. If you’re thinking of using a new broker, reading a review of fxpro, or whichever broker you’re considering, is a wise decision. That way, you’ll be able to avoid any potential scams by finding out from other people what the reality of the broker’s behaviour is – and you’ll also be able to avoid less criminal but still significant risks, such as hidden fees.
Money and risk
The risk-reward relationship has another dimension – one which relates to cash. Take the example of buying a house. One risk in doing so is that you will fall into negative equity – a position in which the amount you owe is higher than the amount of equity you have in the property. For some, this risk might be enough to put them off buying a property. By ensuring that your equity stake is as high as possible, you can reduce the amount of debt you have to take out and hence make it less likely that you’ll end up trapped.
Risk is an inevitable part of all but the least potentially lucrative of investment vehicles – and if you chose to avoid the phenomenon of risk entirely, you’d most likely end up finding yourself without the chance to achieve any rewards. By understanding risk and how it pertains to time, money and knowledge, you’ll be able to give yourself a fighting chance of avoiding problems and losses.