Risk in investment: small steps or giant leaps?
Anyone involved in investment has their own criteria regarding the maximum admissible loss. It’s like the glass that is half-empty to one and half-full to another. The same is true with the methods for investment risk evaluation. For example, some see a certain financial product as an increased hazard for their capital, while others view it as new horizons and opportunities for a quick profit.
You cannot exclude it. But you can manage it.
The reason for this spread in opinions, as a rule, lies within the investor’s psychology — his or her so-called “appetite for risk”. On the other hand, one cannot but take into consideration the differences in financial capabilities: some would be thrown off-track by losing a thousand dollars, while others would not even wince at a million lost.
Is there generally investment without risk? An experienced financier will just give you a sad smile in response: no one, not even the most reliable government bank, can guarantee 100% security of your money. On the other hand, as Walt Wriston, former Citicorp CEO, once noted, “Life is more risk management, rather than exclusion of risks”.
In any case, an investor must make at least a tentative estimate of the possible negative consequences, should a deal go wrong. Let’s look at some popular areas for investing one’s money, from the viewpoint of investment risk management.
Slow and steady wins the race
Once again: the profit you may get from your investment activities is directly related to the risks the investor makes. By limiting your potential losses in advance, you cannot expect sky-high profits. Generally, such “risk-free” investment is good for those who want to protect their capital against inflation, achieve relative stability — which is very important in our time of crisis.
In this article we won’t look at classical bank deposits — putting your money into this type of financial products is usually not even called investment. “Quiet investors” today prefer other directions, such as purchasing precious metals and stones. Gold and diamonds are traditionally considered the most reliable investment. For example, you can get up to 10% p.a. simply by owning diamonds of a certain size and purity!
That’s about the same amount of money an investor would expect from purchasing real estate. You should also remember that even in this traditionally risk-free area a lot is dependent on the location of your properties. Traditionally, foreign investment in real estate — in such tourist and financial destinations as London and Dubai — is considered the safest and most lucrative.
Time to drink champagne?
Everybody knows the proverb that establishes the relation between your appetite for risk and the likelihood of you having the expensive bubbly wine from the French province of Champagne on your menu. If you are lucky enough, you can get in excess of 100% p.a. from high-risk investment! Some financial market regulars can boast up to 50-70% monthly return on their capital.
The rises and falls of currency rates in the Forex market, elegant and mathematically precise option combinations, investing into young and promising startups and commodity futures — these and many other financial market options can double your investment capital in literally a week. But they can also destroy it.
The good thing about the market is being able to regulate your risks — in other words, you can limit the amount of money you are ready to lose. Let’s not forget this means less chance to make monumental profits — but even experienced professionals prefer to trade with moderate risks and earn about 20% a month.
Generally speaking, no professional investor would put all their eggs in one basket — or all their cash into a single financial product. Even with limited funds available, you must try to make some kind of investment portfolio of two or three different instruments. By gradually expanding the portfolio, growing your capital and diversifying it between high-risk and risk-free assets, you will definitely find the risk level you find acceptable.