Risk = Not Knowing What You're Doing
In business, life and investing, you have to decide not whether to take risk, but rather, what kind of risk(s) to take. Every investment or business decision implies some element of risk ranging from low to high.
The Cambridge dictionary refers to risk as 'the possibility of something bad happening'. When it comes to investing money, many people think of risk as the possibility of losing part or all of their money. Investment professionals can refer to risk as the 'variability of returns' and your typical fund manager will see risk as the difference between expectation and results. My all-time favourite quote about risk comes from none other than Warren Buffet: "Risk comes from not knowing what you're doing". I think this nails it.
The Investor...The Biggest Risk in Investing?
The biggest risk with investing is not so much the investment vehicle but actually the investor. If an investor can plan, remain unemotional and become financial literate than riches and wealth are guaranteed.
Many financial advisors and professionals speak of understanding risk and the inherent trade-off between risk and reward. But oftentimes, this falls on deaf ears and people ignore the risk associated with their investment strategies. Why is this? Well, there are 3 likely reasons
1.Many Investors Don't Have a Plan
A plan can simply entail having objectives and timeframes. Planning for retirement in 20 or 30 years time requires a different investment strategy than planning for your children's education or investing in a home in 3 to 5 years time. When you have a plan you are less likely to go off-plan and follow your friends and family into the latest hot-tip investment. You are less likely to get sold on some high-risk, speculative foreign property investment for example. Once you are clear on your objectives and timeframes, and don't let your emotions get in the way (see reason no.2) then you can become rich and build wealth assuredly.
2.Many Investors Invest Emotionally
Many investment. are made foolishly because it makes the investor feel good in the short-term. Buying gold coins, a 5-bedroom villa or a plot of land may make us feel good about ourselves and gives us bragging-rights when we're out and about socially buy oftentimes (not always) these are speculative, high-risk, income sucking money pits. Investing is an intellectual sport. Irrational exuberance has no place on the playing field. Time, patience and discipline are your best friends, impulse your enemy. It never ceases to amaze me how hard people work for their money and then drop money into some glossy, so-called investment product so easily. Investing is a plan, not a product. Asking yourself the question "What Don't I See" or "What Could Go Wrong Here" are vital questions to answer before signing on the dotted line of any investment.
3.Many Investors are Not Financially Literate
Many investors are over-reliant on their financial advisors, accountants and conjecture. The best reason to become financially literate is not so you can control all your investment. but rather that you know what questions to ask your financial advisors and then fully understand their answers. Understanding the costs of an investment (management fees, commissions, taxes) is so unbelievably important. Reducing these costs to a minimum will have a massive effect on your portfolio's value and your wealth. For example, if the investment return is 10% before costs, and intermediation costs are approximately 2%, then you earn 8%. Compounded over 50 years, 8% turns $10,000 into $469,000. But if you could reduce those intermediary costs to 0%, you earn 10%, and the final value is a staggeringly different value of $1,170,000 - nearly three times as much!
Become Your Own Financial Advisor
Investing itself is not risky; not being financially literate is. The key to risk reduction is improved investor 'financial literacy' and reducing over-reliance on accountants, financial advisors and so on. You have to become your own financial advisor. Paying close attention to the seemingly innocuous 1.5 or 2% management/commission fees is vital. As you can see from the above example, they are an insidious eroder of wealth and need to be negotiated down, avoided and minimised where possible. Having an imperfect plan of some kind with objectives and timeframes is truly better than having no plan at all.
Finally, becoming financially literate should become your mission in life if you are to reduce risk and increase the certainty and velocity of return so that you become rich with certainty and make those millions you've dreamed off.
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