Thursday, November 11, 2010

Managing Investment Risk: Risk vs. Risky

Risk and Risky are two different terms. Risk is primarily the amount of control you have over your investment. This control is only available through proper financial education. Every investment or investment strategy has risk and the more the investor stand to lose, the more risk there is. However, risk is not the same as being risky.

Let us take this example. For instance, when you drive your car, there’s risk. That’s why we have things such as seatbelts and airbags but that does not mean you have to be a risky driver. If you obey the traffic regulations and be nice to other drivers, then definitely you can reduce the risk in driving. But there’s still risk as you cannot completely eliminate it. Likewise, all investments carry risk. But risky investors are so-called “risky” because they lack financial education.

Proper financial education manages risk in that it identifies known risks, it determines a strategy for managing risk, and develops a measure for investment rate of return. In summary, the lack of financial education is considered to be RISKY since most mistakes are made by people who don’t know what they are doing.

Lastly, each and every investor to prepare themselves emotionally when it comes to investing. Instead of saying, “that’s too risky”, ask yourself “how can I manage that type of risk?”. Instead of saying “I can’t do that, ask yourself “how could I make that happen?”. Lastly, instead of saying “that’s too scary for someone like me, ask yourself “how can I overcome my fears and make this investment successful?”


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