We can break risk into four general categories:
• Low Risk - You just want to stay ahead of inflation and earn more than a savings account (govt bonds)
• Moderate - In an attempt to earn more, willing to accept the possibility to lose 10% or more in one year. (index mutual funds, blue-chip stocks, bonds)
• High - Goal is to earn above-average return on investments, by using a logical investment strategy with reasonable objectives (stock trading)
• Very High - In an attempt to make as much as possible in the least amount of time, willing to take huge risks. Most speculators who see a get-rich-quick solution will end up a big loser.
And there are other kinds of risk:
• Inflation Risk - Inflation may go up faster than the value of your investments leaving you with less money than you started with.
• Interest Rate Risk - If interest rates rise, business growth slows and the value of bonds you may hold will fall.
• Market Risk - The stock market itself may fall on hard times. Three out of four stocks fall during a bear market
• Liquidity Risk - Holding stock with little demand (thinly traded) exposes you to the risk of a quick loss with relatively few people buying.
• Psychological Risk - When emotions take over, good judgment and investing rules fly out the window.
To understand your risk profile you answer the following questions
• What is your age
• Your financial position self employed or government job or entrepreneur
• What for you are investing insurance marriage buy a house children education
• What portion of your income to be invested
• Your earnings in the future
Subscribe in a reader
