Ideas for Managing Investment Risk

Some ideas on Risk and investing

A friend of mine last week asked about buying some ETF's. He knew I spent time buying stocks, but as he said, " I don't want anything exciting". His view was buying ETF's was less risky, and therefore better aligned with his investing goals and interests. I can't argue with his thinking, but I am not sure it would suit my investing goals and interests. We are two different people.

Risk is often the specific factor that people will cite as to why they will not buy individual stocks but instead look for other avenues for saving and investing risk of rain 2 acrid. The attraction of vehicles like ETF's and mutual funds fulfill their need to be invested, but avoids them having to spend the time and worry of picking stocks. The diversification achieved through these vehicles creates the illusion of less risk, and in a steady market that is generally true.

I checked out iGoogle for a definition and it talks about risk as either a source of danger as well as the probability of a negative outcome. It also has two interesting examples that identify a risky investment or losing money. For the purposes specific to investing I would like to call it a measure that specifies the chance of an outcome not matching your expectations. If there is an 80% risk of rain bring an umbrella! If it is just 10% then you might be fine. The difference between investing and rain forecasts is you can have 0% chance of rain, but never 0% investment risk.

An investor gets paid for taking a risk with the general rule being, the more risk you take, the more money you make. The economy is based on this simple concept. If someone else uses your money they pay rent, or interest. The likelihood of you getting your money back determines how much interest you charge. This exact same concept applies to buying stock. If the risk is higher you expect, and demand a higher return for taking that risk.

Let's start by examining a government Savings Bond. I did some poking around and found one that is paying a huge %0.65. That means a 0 bond held for 1 year pays you 65 cents. With government bonds there is almost no risk. You will absolutely get paid. This particular bond is also flexible. Part way through the year you can get your cash back. No interest, but, no problem either since you are not locked in. For a government bond you have not accepted much risk, so the money you are paid is tiny.

The better question to ask is "did you make money?" With an inflation rate at about 2% you need to make on your hundred-dollar investment, just to stay even. In this case with only 65 cents you actually lost wealth since you can buy less with the money you took out after a year. You actually traded financial risk for inflation risk and lost.

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sam harries Joined: August 20th, 2020