DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.1//EN" ""> Risk is the Danger of Losing Money

"Risk is the Danger You Could Lose Money You've Invested"

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What is Risk

In general language, risk means danger.

Yet, if you read many financial books, you can get the idea that risk, is some sort of thing that just randomly takes away some of your money.

That's not true.

In conventional financial terms, risk is assumed to be the same thing as volatility. That is, you buy a security and its market price bounces up and down. The more it does so, the more the chance that its price will be low if you go to sell it.

So first of all, if you never sell the security, volatility is irrelevant to you. But does that mean you have no risk?

Obviously not. The company could still go out of business. Volatility itself is not a good measure of a corporation's future.

Another complication is that volatility also implies price rises, as well as price decreases. But if you're investing for capital gains, price increases are a good thing.

Gee, you're at risk of your stock's doubling in price in a year. Gosh how awful.

Yet it's also true that the more likely it is that a stock could go up a lot, it's also true that the more likely it is that the same stock could go down a lot in price.

We are told to "manage" investment risk

Financial risk is often expressed as a percentage, as though that's simply a lifeless number.

Or it's expressed as how much more or less a stock or investment goes down than the average.

Let's keep something in mind here.

Although all kinds of investing involve a lot of paperwork, the exchange of money, facts and figures -- all this represents an underlying reality.

For any and every kind of investment, there's something happening in the real world

A business that must sell widgets to survive.

A government with taxpayers.

Homeowners that send in monthly mortgage payments.

As we all know (some of us more than others), not everything in the real world works out as we hope, plan and dream.

Small businesses go out of business at a high rate.

Big businesses go out of business or lose money.

Governments don't collect as much tax money as they expect.

They economy goes into a recession.

Interest rates rise and fall.

A super cold night in Brazil sends coffee prices through the roof.

Many events are occurring throughout the world which we cannot foresee nor control, yet they can affect our financial investments, and therefore creating investing risk

On September 11, 2011 nineteen fanatics with box cutters drove the United States into a deeper recession.

A terrorist with an atomic bomb could do much worse.

Therefore, you should perceive stock investment risk as danger to your money

Fortunately, because we live in a complicated economy of rules by law, there's a constant ebb and flow of money that helps to keep the entire system running.

You cannot guard against total disasters, but you can and should be aware that certain investments are riskier than others, and therefore determine what level of investment risks you are willing to take.

Wars happen. Businesses large and small fail. County governments go bankrupt. State governments have huge budget shortfalls. Some foreign governments are overthrown by their own people or by invasions or by rebel armies.

Just as you cannot guarantee your personal safety, you cannot guarantee the absolute safety of your money

However, you can and should take sensible precautions -- equivalent to looking both ways before crossing the street, not playing with matches and so on. That's managing investment risk.

In the financial world, the United States government is considered to have zero risk.

That's partly a tribute to our success as a country, the unbroken chain of government under the Constitution for over 200 years (France is a much older country, but has had five constitutions since overthrowing its monarchy, for example), the world dominance of the dollar as a currency, its history and demonstrated commitment to paying its obligations and also to the government's power to tax its citizens -- as well as the presumption that its citizens have enough income to tax.

Of course, other developed countries also have governments able and committed to paying off their financial obligations as well. It's not likely that Canada, Great Britain, New Zealand, Australia, Japan or (even) France are going to change governments any time soon.

Those are the only no risk investments available.

Next, one way to reduce risk is spreading it around, or: Hedging

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