|
 |
|
|
What are the Real Risks in Investing |
| |
Investors often get hung up on the wrong phenomena when they think about the risks of investing. Many investors think daily market fluctuations are the main risk: you buy into the market today and next week it may fall 10 percent, resulting in a 10 percent "loss" under this definition of risk. But those fluctuations really don’t quantify or capture the real risks faced by investors (after all, no one seems to mind market fluctuations when they are up-ward fluctuations).
Business risk
One real risk to worry about concerns the future of a business in which you are investing. You face the risk that it could go out of business altogether, or that its position in the business world will be so damaged-say by bad management or competition that it will decline and never recover.
This type of risk is called "business risk." It is fundamental to any investment in the business world. The easiest way to obviate this risk is to own a widely diversified group of businesses. The owner of a mutual fund that invests in hundreds of companies has little to fear from one company going broke.
Financial risk
Financial risk is another fundamental problem. It is the danger that the excessive use of borrowing will turn into a catastrophe.
Someone with a long time horizon can ride out even steep declines in markets. But the investor who has borrowed in order to make his investments may have to find large amounts of cash to cover his loans at a time when the value of the assets backing up those loans has deteriorated. The obvious way to avoid this risk is to avoid investing with borrowed money.
Valuation risk
This may be the most important risk of all. You take it on when you buy a stock that is overvalued in relation to its potential earnings and prospects. This is typical of a “growth” stock that investors are enthusiastic about and have bid up the stock’s price far above its capacity to reward them.
The best way to avoid this risk is to tilt your portfolio toward value stocks, in other words, stocks whose price is cheap in comparison to the true value of their underlying businesses. These stocks provide a margin of safety when things go wrong and more growth potential when positive surprises occur.
©OSB Financial Services, INC rights reserves.Information has been obtained form sources believed to be reliable, but its accuracy and completeness and the options based thereon, are not guaranteed. Always consult your a financial adviser and prospectus before making an investment
©2009, Kelly Ruggles Web site
Kelly C. Ruggles is a fee-based financial planner located in Spokane.
Kelly C. Ruggles, President of American Reliance Group, Inc., a registered investment advisor.
Kelly Ruggles is the author of "The Financial Playbook" for Retirement
Kelly C. Ruggles does not intend to provide personalized investment advice through this publication and does not represent the strategies or services discussed are suitable for any investor. Investors should consult with their financial advisors prior to making any investment decisions
|
|
|
|
