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Investment Risk

4/4/2016

What is an investment? ďThe outlay of money usually for income or profitĒ. We all know what risk means, ďThe possibility that something bad or unpleasant (such as an injury or a loss) will happenĒ. 

 

How serious do you consider the risk of an investment. Risk is very different for each individual. Some love to jump from an airplane with a parachute while others hesitate to fly in an airplane. The thought of losing money to some isnít a consideration, they want guarantees their investment (money) is safe from loss, while others focus on the income, or profit of the investment, ignoring, or minimalizing risk. Others want to take risk but fear losing money, they are paralyzed by over analyzing, known as Analysis Paralysis: inability to make an investment decision because of the sheer quantity of information to be taken into account. This is very common, with all the information available today people get Analysis Paralysis, which will paralyze a person to the point of not making a decision. Then when they do make a decision they panic, second guessing their decision.

 

We often hear, ďKnow your investment riskĒ. Financial Advisors and other have surveys, forms and tests to analyze investment risk. Most of these are as reliable as the weather. These forms, tests and surveys give a false sense of comfort. It will take an investment loss for you to understand if your risk tolerance is ďmoderateĒ, or high. If after losing money on an investment you canít sleep, you place blame and wish you had completed the risk tolerance forms different, then you will realize how much risk you can tolerate. Point is, no one knows their investment risk until after they lose money. There is no such thing as taking moderate to high investment risk and winning 100%, no human in history has ever won 100% over long periods of time, and you wonít be the first. 

 

How much does age factor into Investment Risk. It should be a large factor if your money is professionally managed. Fiduciaries have guidelines. They can put themselves and their company at risk by putting elderly clients into high risk investments, at least this is supposed to be a factor, but too often this is ignored.

 

Consider working every day for many years, saving your hard earned money that canít be replaced. You meet with a referred financial advisor looking for investment help, or to consider managing your money. The thought of this is scary for most, as it should be. A 2016 study found that 7% of financial advisors have committed fraud, those are the ones they know about, and odds are the percentage of those not caught is much higher. You speak with this person for an hour, complete some forms and hand over your money. This is the highest investment risk you will ever take!

 

Are you smart? If you answered yes, then odds are you are as smart, or smarter than many financial advisors. Whatís stopping you from learning what they know, think about it? No one cares more about your money than you, no one, never forget this, so why not learn what others know and manage your own money, at least part of it. Donít let the confusing financial jargon scare you, itís confusing for a reason, itís meant to intimidate so you will pay a professional. The only way you will know if someone else is capable of managing your money if you understand how to manage it yourself.

 

The point of this article is to promote thought. Look at things different, donít accept the status quo just because every financial article says it must be done a certain way, donít believe it.

 

 

Phillip Day, President






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