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FP Article 15 (To sign up for a FREE 16-lesson eCourse on Investment Risk, please click here.)

Investment Risk - Understanding and Profiting From It!

by Rajen Devadason

We all covet wealth, but not its perils.

Jean De La Bruyere

  In an ideal world, we'd love to be able to make oodles of money without taking on any risk. Unfortunately, in our real world - which, as wonderful as it is, is light years away from being ideal - to make real money, real risk has to be accepted.

Thankfully, this doesn't mean we need to become gamblers.

The risk-reward relationship allows us to understand that the more investment risk we are willing to take, in intelligent ways, the greater our potential reward.

 

 

 

 

 

 

 



Two smart ways to reduce your overall investment risk are hedging and diversifying.

Hedging involves complex matching activities such as buying a mother share on the expectation that it will rise in price and simultaneously buying a put option that allows you the right but not the obligation to sell that same share at a particular price level. The first transaction allows you to profit from an upswing in the stock's price. The second permits you to benefit from a possible price collapse.

This is an article explaining investment risk. I hope you enjoy reading it. But if it isn't what you're looking for, you're welcome to search for something that better meets your needs. Thank you for allowing me to serve you.

Rajen Devadason

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Diversifying is rather different. It is the process of not putting all your investment eggs in one basket. When diversifying, the most important consideration is buying as many 'negatively correlated' assets as possible. That is mere investment jargon for purchasing an asset that tends to zig, while another zags!

There are many forms of investment risk. Many years ago, in 2000, while researching what became my fourth book (Financial Freedom 2 - Through Malaysian Equities and Unit Trusts, which is now out of print) I identified 15 distinct forms of investment risk.

If you'd like to learn what they are, please feel free to click on the relevant links below:

15 Types of Investment Risk (OR, to sign up for a FREE 16-lesson eCourse on Investment Risk, please click here.)

1. Borrowing Risk

2. Company Risk

3. Credit Risk

4. Currency Risk

5. Diversification Risk

6. Industry Risk

7. Inflation Risk

8. Interest Rate Risk

9. Liquidity Risk

10. Lost Opportunity Risk

11. Manager's Risk

12. Market Risk

13. Market Timing Risk

14. Political Risk

15. Prepayment Risk

 

It may take you quite some time to go over each of the 15 types of investment risk, so feel free to bookmark this page if you'd like to make it easy to return to this page as often as you like.

As you learn more and more about investment risk, you will grow more comfortable in taking on appropriate forms of it with a view to prospering. That would be a good thing.

It was General George S. Patton who said, "Take calculated risks. That is quite different from being rash."

Considering Patton's primary arena of endeavour was far removed from the capital markets of our 21st century, it's remarkable how relevant his observation is to us.

I wish you well in your search for knowledge that should set you and your family on the road to financial freedom.

 

 

© Rajen Devadason

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Rajen Devadason, CEO RD WealthCreation Sdn Bhd & RD Book Projects
349, Desa Rasah, Jalan Bayan 7, 70300 Seremban, NS, Malaysia
Tel/Fax: +606 632 8955

 
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