Investment Risks

Risk MitigationInvestment risks:

Investment doesn’t follow a straight line as much as you may want them to give returns every year, there are ups & lows it’s is called volatility which carries a certain amount of investment risk based on time factor.  Whether we invest in bank fixed term deposit, real estate or stocks, we are directly / indirectly investing in a business all carry different levels of investment risk. When you put money in fixed deposit,  the bank lends your money to businesses. When you buy real estate, we rent it out to business, or individuals who get employed by businesses. When we buy equities, we are buying stakes in businesses. So investing is basically giving your money to the business in the hope that we get a good return for risk taken. So any investment carries investment risk.

Volatility:

Why the business experience ups & downs, all the investments are affected by the economy. The economy experience business cycles (volatility). So when the business cycle causes businesses to experience a downturn, there is a flow-on effect on other types of investment. This is economic volatility specific business we invested in experiences turbulence for reasons other than the economy or business cycle. It could be because of management decision, regulatory changes, technological disruptions etc. local property could be affected by local demand & supply, new infrastructure coming up, or even a natural calamity. Your fixed deposit can be affected if the bank or company offering it has been reckless in its operations and get a  credit rating downgrade. This is fundamental or business volatility.

Listed stocks:

Stocks are basically stakes in businesses, but they are listed in stock exchange to help you buy or sell your stakes easily. While the price of a stock should not change on a daily basis because the economic or business-specific factors don’t  change on a daily basis. the fact is it does. Some of the price volatility can be explained some can’t. In some way, this volatility is good because it allows a savvy investor to buy a stock at bargain prices.

Keep calm & carry on:

When we invest, we should definitely assess the economic and business-specific factors that could affect out investment. This shows we need to have some long-term view, we also need to access whether the risk taken is in line with the reward. we need to ensure we don’t over pay for these investments, indeed it’s prudent to keep a margin of safety. If we have the time and expertise, we can do it ourselves, else we can invest through mutual funds and hire a financial adviser to help us. While some of these financial experts have the skill to take advantage of price volatility,  most don’t. So you ignore the daily price volatility of your listed investment. Like the price of your house you don’t check daily, we suggest you don’t bother checking the price of your stocks every day, that way you can ignore the price volatility and keep calm & carry more important things in your life thus building wealth generation.

 

 

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