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 |
|
|
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
