Investment Risks: Every Investment Has Risk

by humagaia

Investment risks may be high risk or low risk. There is no such thing as risk free investments. Planning a low risk investment strategy for long term, & high risk for short term is

Investment risk cannot be negated. There never has been a no risk investment. Whether we are looking for low risk high yield or high return, or for high risk high return investments there is always the element of risk. It is for each investor to know what level of risk they are prepared to endure. Once you know your customer (you) and the psychological impact that risk might have, then an investment strategy can be implemented that takes that level of risk into account.
Investment risk is different things to different people. Someone who is prepared to take on larger risk might see a lower risk investment as being a higher risk due to loss of opportunity. Only you can know what investment risk means to you.

Investment Risks

Low risk investments

There was a time when keeping your money in a Savings and Loan (UK Building Society) or bank savings account was relatively safe - even if it did not secure an exciting return.

Times changed, especially when investors chased higher returns from foreign banking institutions. If a UK investor deposited their money in an Icelandic Bank on the basis that a higher interest rate was forthcoming, then they sacrificed security, even though they may not have known it. The safety net of depositing their money in a UK bank, for the prospect of earning a greater amount of money in an offshore location, was forfeit.

You must determine the possible downsides of any investment decision in order to determine whether you are comfortable undertaking the action.

The failure of collateralized loans, particularly house mortgage loans to higher risk individuals, proved to be the tipping point for security in money-based institutions. It was then that the general public realized that the safety of their money was an illusion, swept away by the tide of banking greed.

Some Governments bailed out their banks to try to stabilize the industry and stave off economic ruin. At the same time they needed to reassure investors that their money was still safe in domestic banks. With the UK Government Bank Deposit Guarantee Scheme, money deposited with a UK Bank, Building Society or Credit Union, a net balance up to £50,000 has been secured.

What Is Risk?

Risk is the potential that a chosen action or activity will lead to a loss. The notion implies that a choice having an influence on the outcome exists. Potential losses themselves may also be called "risks". Almost any human endeavor ...
Risks with investment

So you see from this that everyone is an investor and should take the time to understand investments so that they are not burned by the decisions they make with their money.

Be aware that it is not a panacea that higher risk automatically guarantees a higher return.

Far from it!

Even in a "bull" (rising) market you may be unlucky enough to pick the wrong shares and lose money, relatively speaking. Opting for the riskier investment would not have produced a higher return - even though other investors, who chose alternative shares, might have succeeded.

These are just aspects of the risks in investment.

There are always risks, even if you stash your money in the mattress, when inflation, and the possible collapse of the currency, could devalue your savings. This is where risk assessment, investment risk analysis and risk management are utilized.

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Higher Risk Investments

High investment returns

Now suppose you decide your investment strategy should be to extract your money from your account and invest it in the stock market, in order to gain a higher return.

You can check on the internet to see how much better this would have been over the entire period that any stock exchange has been in existence. At no time has the return (basing a general investment on the stock exchange index) been lower than the return from a deposit account.

Of course, if you had been unlucky enough to choose the wrong stocks or shares, or had speculated unwisely, then this situation could have been reversed.

Even the dramatic falls in all of the 'stock market crashes' did not put a stop to the overall rising trend seen throughout securities investment history.

Historically, during these crashes, the security prices dropped to levels seen in the not too distant past. It was the speculators that got burned: the investors just viewed it as a short-term blip in their long-term view of their investment strategy.

At no time though did the average rate of return on securites (stocks / shares) fall anywhere near as low as the return that would have accrued from a deposit account. And that includes term savings investments.

Do not take these statements to mean that if you are risk averse that you should still invest in the stock market.

There is another side to the coin: the question of risk.

The higher the return the higher the risk.

High Risk Investments: Low Risk Investments

High investment returns: risk free investments

With everything in life there is risk. And we all try to limit that risk, even if unconsciously. Our temperament determines whether we are a risk taker, or risk averse. When we decide, in investment terms, to take a risk, that can be on the basis of potential income and potential gain on investment.

Higher potential income is tempered, usually, by a lower potential gain, and vice versa.

What we are looking for when high risk investments are involved are mitigating circumstances that make the risk worthwhile:

  • high risk high return investments
  • high growth investments

The potential for high returns clouds our judgement somewhat.

When looking for risk free investments, no risk investments, or low risk investments we are likely to find most will have low returns and / or low to nil income. The Holy Grail of low risk investment strategies is to find the best low risk investment options:

  • high yield low risk investments
  • low risk high return investments
  • low risk high growth investments

But finding these is no easy task.

The only way to find them is by consistent detailed analysis of the risk involved against the return on investment, whether that be growth or income.

Next Investment Article

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Updated: 03/17/2012, humagaia
 
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