Investments remains to be one of the smartest moves consumers can make but a lot of people are concerned with financial risk that comes with it. It is like eating your favorite food but you stop dead on your tracks because you are afraid of the pounds that you will add on. It forces you to pause and think about your decision and the consequences that it brings.
But there are a lot of people who would be quick to point out that investments will be a big factor in retiring early. This can be a deal breaker for most because the future is something a lot of consumers prepare hard for. But the current situation with limited or having just enough for the present prevents families in financially preparing for their future self.
Investments are sometimes also scary to people because it holds a certain mystique into it with the fact that there rarely an assurance that things will not go south. There is always that thought at the back of your mind that the market can crash or that the company can tank. But on the other end, there is the possibility of earning a lot and making your money work for you.
This might be one of the reasons why CNN.com shared recently that over 50% of American consumers have absolutely $0 in the stock market. This is a big loss to people but a massive opportunity for some. This alone can picture how some consumers feel about the stock market and essentially the financial risk that comes along with it.
risk with investments
Risks will always play a part in financial decisions especially with your investments. Here are a few things you can look into to help you manage your margin of error and risk.
- Know your risk appetite. One of the first things you need to do is understand your personality that directly affects your comfort level in investing. In fact, a lot of financial institutions and fund managers would look at this first before talking about several investment products. It is understandable that first timers would be conservative and would want to stay away from financial risk as far as possible. The more experience you get in investing, the more you can take in risk and start to be moderately aggressive until you consider how to make aggressive investments. The biggest difference between conservative and aggressive apart from the risk are the returns. Risk and returns are proportional to each other because the higher the risk, the bigger the potential return could be.
- Take your age in consideration. Age is an important factor when you talk about investments and finances in general. Just as there are financial complications of having a child at an old age, there are also financial risks when you do not manage your investments in tune with your age. Going back to your risk appetite, you can start off aggressive at an early age because if things go south, you can still recuperate whatever loss you incur. But if you keep at an aggressive stance at old age and the returns do not play out as projected, you would have a harder time bouncing back because you do not have much time to save up again. The idea is to slowly convert investments into conservative risk as you age to manage losses and be able to enjoy your money.
- Conduct due diligence. One way to manage financial risk is to conduct due diligence on whatever investment you are looking to take up. Even angel investors conduct due diligence before or immediately after signing term sheets or investment documents according to Economictimes.com. You need to make sure that you are not falling into scams and exerting all effort to do that has to happen before putting your money in an investment.
- Do not put all your eggs in one basket. Do not put all your money in one account, all your gas in one container. You get the picture? Investing all in one stock or company exposes your money to what is referred to as avoidable risk. If the company tanks, you can lose all the money you invested. Be sure to diversify your investment portfolio to manage financial risk. Just like if your bank suddenly closes, you at least have other funds in other banks so you do not go back to zero.
- Surround yourself with people you can trust. Personal finance is only personal because you make the decisions at the end of the day but you need a lot of people to arrive at that decision. Learn to trust people but don’t be too gullible. Start with family and close friends – people you know would always have your best interest at heart. You then look at office friends and even people in your bank who can give professional advice on how you can best manage financial risk.
- Monitor your investments. Do not leave everything on the hands of fund managers regardless how good they are with the returns on your investments. Be active and learn how to monitor your investments. If there are things you do not understand, ask your fund manager about it so understand what is happening. Do not be a passive investor where you just wait and accept things that come your way.
Why invest on the future
There might come a time when you start to question the reason for your actions. Here are some of the realities that you need to remember
- You cannot work forever. One of the sins you are committing against your retirement fund is when you start to believe that you would not need one. You might feel all high and mighty at one point in your life that you scoff at the idea of saving for the time you cannot work anymore. Age might be just a number but it is something you can never turn back. Some scrupulous car shops might be able to reverse the car’s odometer making it younger than it really is. But you cannot do the same on your age. The time will come when you can no longer work and you would have to use your savings.
- You need to take care of yourself and your family. WSJ.com shared in an article that the 2015 graduates holds the distinction of having the highest average student loan debt at a startling $35,000. You can help your children do away with this burden by planning for a college fund early on in their life. You can also get them involved to make them understand how hard it is to save up for college so they shouldn’t put it t waste.
- To reach your financial goals. You invest to help you reach your financial goals whether it is having a house of your own, setting up a business that you are passionate about or even travelling the world. You invest to help you reach your financial goals.
Financial risk will always come with any financial decision in life. What you need to look into is to balance this and weigh it out with the potential benefits. Would the potential gains in your investment cover any perceived risk along the way or would you lose everything you have? You need to balance it out so you can still make investments and reach your financial goals in life.