moneyFYI
Financial Freedom Is Merely Organized Common Sense
Thinking About Risk
Risk is not a probability thing
Risk is certain.
If you look at an index over a long time, there are loss years. If you see risk as the possibility of having a loss, you will find the stock market troubling.
You could invest in things where there is no apparent way to lose. That is risky too. Burying $100,000 in a box in your backyard has risk. Even if you ignore the risk of having the money stolen or deteriorating, there is risk. When you dig it up some other day, it will likely buy less than it did when you buried it.
You have as much money but considerably less purchasing power. That is a loss.
You need equities to gain purchasing power
The question eventually becomes what will you do when the market falls?
Things to think about
- If you cannot afford a paper loss without affecting lifestyle, you cannot play the game. You must have the capacity to sustain fluctuations. That is why you must be aware of problems using leverage.
- You can adjust your exposure and in some cases minimize your risk. It has to do with investment selection. Investing in a friend’s new restaurant has more risk potential than does buying Johnson & Johnson. Look for things you can understand. Manage risk.
- Losses are emotional.
- If you can’t manage your emotions, you may do things wrong when losses appear. Fear is a poor counselor. Risk feelings and loss feelings are defeated by faith. Study market history and notice losses over longish periods are rare. If it works in the long run, why sweat the short run?
- Greed matters too. When things are good, people lose track of their reasonable objectives. Seek sufficient not maximums. If you doubled your money would you live differently? Maybe, but if by trying to double you lose half, would you live differently? Today could be okay, but retirement looks bleak.
Risk of fluctuation is high.
Risk of loss is different. You must close the position to have a loss. That is a problem if you must do it. So be careful of leverage. Know when you need the money. Learn enough about markets to have faith. Reign in the greed. Have reasonable expectations.
The biggest factor in managing risk is managing yourself. Be sure you know how that factor works.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.
In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. don@moneyfyi.com 866-285-7772
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