In an ideal world of investment strategies, we all basically want to achieve the same goal. We want to minimize our losses while enjoying the benefits of high payoffs. Looking at these two, they seem to be pitted at opposite ends of the pendulum, so what's the answer? Is it possible to minimize our potential for loss while steadily increasing our profit? The answer here lies in having the right perspective. Let's take a look:
Minimizing losses when it comes to investment strategies operates much the same as anything else in life. It involves understanding risk. That's the key.
With anything, there is a certain amount of risk involved. It's all around us and we are calculating our risk vs. return with every decision we make. For example, at the most basic level, walking across the street involves a certain amount of risk. Is the risk worth it? There is potential for danger (or losses) but we make the internal decision based on our observations, our past experience, and our internal calculations of 'what could happen' and how probable an adverse or positive outcome would be.
Now, transfer that knowledge over to investment strategies and you'll see the same basic principles at work. Risk assessment in investing, just as in any other decision in life, can be defined as: what you are willing to bear for the expected return.
If you are new to investing, you may not have past experience, observations, or internal calculations to go by. This is where many individuals who begin retirement planning fall short, since assessing investment risk is a bit more complex than simply crossing the highway. Securing your financial future while taking probable risk factors into account involves:
Market timing - Many investors jump on and invest in stocks at the wrong time. Often. investing in a hot sector that has already done well involves a great deal of risk. It may have already had its run and is on its way down. According to a study conducted by William F. Sharpe, a Nobel Prize-Winning economist, attempting to time the market is not a safe bet. The investor needs to be right approximately three out of four times to match the investment strategy of the buy-and-hold investor. We all know that unexpected events often cause great shifts in the market, so solid investments that perform well over time are key.Diversification and Asset Allocation - Spreading your investment dollars across several types of investments and understanding how they move in relation to one another minimizes your overall risk factor while maximizing returns. This proven principle also works the same in life decisions. If you are a business owner who relies solely on one major client, you may reap huge financial benefits for a short amount of time, but your risk factor is great. If losing this one client will fold your business, then you have not planned wisely. It is safer, and more profitable to have several clients that can safely balance your profits while minimizing your risk. Same basic principle with diversification and asset allocation.
These are just a few variables to take into consideration, but you get the idea. The bottom line here? Everything in life involves a certain amount of risk, and investments are no exception. The key to overcoming this risk in order to succeed financially is accomplished by having the right perspective.
Investment strategies don't have to be overly complicated or impossible to understand. By learning to calculate your personal factors (which include your age, how much you can reasonably expect to see as a return, and your current financial situation) against investment factors (such as interest rates, inflation projections, and market performance) you can come up with an investment strategy that is the perfect fit for your personal risk tolerance.
For more information on retirement planning and investment strategies, check out: 6 Pitfalls of Retirement Planning and The 7 Deadly Traps of Investing. We bring clarity to the most common gray areas and stumbling blocks that keep investors from experiencing success. An enjoyable, financially stable future can be yours, regardless of where you are starting from. We will put you on the path to success.
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