Published On: Fri, May 20th, 2016

Should You Do Your Best to Avoid Risks When Investing?

It’s hard to find any piece of writing about investment that doesn’t include the word risk somewhere. This is for fairly obvious reasons; investment and risk will always be closely intertwined. Putting your money into something that might make you a profit but might also lose you money is, inherently, a risk.

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All of this puts many people off of getting into investing completely. For others, they’ll only tread lightly into the waters of investing. This is done by heavily practicing the art of risk aversion. All investors should be practicing risk aversion to some degree. But the people who are really risk aversive are identifiable by their tendency to always go for whatever option carries the least risk.

The question is: Is this always the smart thing to do?

Of course, the severity risk is, to some degree, largely a matter of perception and financial status. Some find the purchasing a lottery ticket to be an unworthy risk. Others will barely bat an eyelid at risking millions on whether or not a bit of stock will fall in value by next year. But, in general, how worthy a risk an investment is will all depends on the numbers and a couple of other variables.

Those variables will include things with volatility and fraud. With investments options in which fraud is a common risk, such as microcap stocks, people will generally just turn away. But if you know what to do in the case of fraud, then you can protect yourself. After all, “risk” in the world of investment is not much more than a permanent loss of capital. And if you prepare yourself for a fraudulent situation by speaking to a securities litigator like Martin Chitwood, then you greatly offset the risk of a permanent loss.

As for volatility, this is a misunderstood arena. If a particular investment is volatile, then many people will see it as high-risk and try to focus on the numbers. (The numbers, here, being statistics and return potential.) But how high-risk a volatile investment is depends on the time period over which you’re making your investment. Risk and volatility aren’t interchangeable terms! If you’re looking for a short-term investment, then something like stocks might not be a smart risk. But if you’re looking a long-term investment – say, twenty years – then the risk is reduced greatly. The value of stock can change wildly over the course of, say, a year. But over twenty years, you’re much more likely to see the value increase.

All of this is to highlight the fact that there is a difference – and a fine line – between risk aversion and risk management. By making smart decisions, you can bridge the gap between aversion and management. In this way, you can take on high-risk investments without worrying so much. Because the fact is that many investments that could make you a lot of money are high-risk.

Let’s end with a quick example. Let’s say, in one hand, you’re looking at an investment that all but guarantees a return of 5% of your capital. In the other, you have an investment that gives you a 75% chance of a 30% return. There’s also a 15% chance of a 30% loss. With proper risk management, you can turn the latter option into the smart decision.