For a lot of investors, investing can be a pretty simple activity. It involves keeping oneself updated through numerous magazines, newspapers and news channels about the latest, most touted investment opportunities. The next step is obvious -- invest in these opportunities to the hilt in the hope of making some easy money. And if everything goes right, investors would have made a neat packet all because they were quick to seize upon these great investment opportunities.
We are sure the 'investment process' we have outlined will strike a chord with many an investor. We are not saying this is how all investors are investing, but it is a disturbingly familiar sight. As more and more newspapers, news channels, magazines, personal finance initiatives get launched, media hype around these so-called investment opportunities builds up even more rapidly, which in turn feeds investor interest. This escalates to a point where investors believe that since everyone is investing in the 'hot' investment opportunity, prudence demands that they adopt the same course of action, because not doing so will entail a great opportunity loss.
We could write an entire note on how this whole rigmarole is a prefect recipe for disaster and that investors should take the media hype with a bagful of salt. Over here we wish to highlight something critical that is overlooked by all three parties - the service provider that launches the investment opportunity, media that cannot seem to hype enough about it and the investor who is led to believe that it's the best thing to happen to him in a long time. And that small detail that is overlooked is the risk of investing in the 'hot opportunity'.
But how does the investor go about assessing his risk appetite? If an investor can afford to lose significant amount of money on his principal before it can generate a return, then his risk appetite is high. Put bluntly, risk is the amount of money that the investor can afford to lose, in the interim, in his quest for a certain return on his investment. If an investor can afford to lose only a moderate amount of money, then his risk appetite is on the lower side.
Our grouse with the media hype over a particular investment opportunity and investor enthusiasm for the same, is that rarely, if ever, is the risk of investing in the opportunity highlighted. It's always about how rewarding the opportunity can prove to be and never about how much the investor can stand to lose (i.e. risk) if the opportunity does not quite blossom like it's meant to. In other words, the investor gets half-baked, incomplete information. As a matter of fact, in the absence of information related to risk, information isn't just incomplete, it's downright misleading.
In our view, any discussion on an investment avenue is incomplete unless it underlines the risk along with the (probable) return on it. To that end, investors must pay as much attention to the risk of investing in an asset as the return on it. While it is difficult to quantify your appetite for risk, there are ways through which you can get a fairly good idea about how much risk you can take on in your quest for a return. We have highlighted some of the key points to keep in mind while evaluating your own risk appetite:
1) Risk can be loosely defined as the money you can afford to lose in the interim period until you achieve the return you have in mind. If you can afford to see significant erosion in your investments (say upto 50 per cent of investments) in order to achieve the target return then that makes you a high risk investor. If you are the type, who can tolerate a dip in your investments only upto a certain level (say upto 10 per cent), then you are low risk investor. While the fall in the investment value (10 per cent and 50 per cent) is only indicative, we are sure you get the drift.
2) Your choice of investments must flow from your risk. If you can take a 50 per cent drop in your investments then high risk investments like technology stocks/funds or aggressively managed funds like mid cap funds could suit your appetite. If you cannot tolerate too much volatility, then you must opt for lower risk investments like balanced funds (which invest about 65 per cent of assets in equities) for instance. The idea is to make your risk appetite and not the investment opportunity, as the reference point. Most investment disasters are fashioned when investors use the investment as a reference point and then try to mould their risk appetite accordingly.
3) The risk associated with an investment has a lot to do with the investment timing. One reason why a lot of investors burn their fingers (and portfolios) with the hot investment opportunities is not because the opportunity was a dud or because the media reported it all wrong; it's mainly because by the time they invested in the opportunity, it had already run its course and had peaked. In other words, it was a bubble waiting to burst. And since all good things must come to an end, the investment opportunity soon embarks on its (sharp) decline hurting investors who came in towards the end, the most. These investors either lose a lot of money or make so little of it that it's not worth the effort (and hype).
So the next time you hear/read of the next big opportunity in the media, ask yourself a simple question -- is it possible that since this hot opportunity is yesterday's news it has already run up more than it should and if I enter in it today I may either lose money or make very little money? A lot of investors, who if they had asked themselves this question, would not have been hurt in the hot investment opportunities of yore like technology/media stocks, mid caps, real estate and gold to cite a few.
4) Another strange aspect of risk is that it decreases with time. Certain market-linked investments like equities appear very risky prima facie. While this risk is clear and present, it's important to recognise that this risk is amplified over the short-term (less than 3 years). Over the long-term, the risk of investing in equities reduces. As a prominent fund manager observed equities are the riskiest asset over the short-term and the safest asset over the long-term. That is why where equities are concerned it pays to have a really long-term investment horizon.
5) Contrary to popular expert opinion, risk appetite for equities is not '100 minus the investor's age'. So if an investor is 30 years old, it does not necessarily imply that he must have 70 per cent of assets in equities (according to the 'formula' it does). Apart from the fact that this is skewed asset allocation, the investor may just not have the risk appetite for a 70 per cent equity allocation. He could be one of those investors who cannot tolerate more than a 10 per cent drop in his investments (refer Point 1), in which case a 70 per cent equity investment is a clear invitation to disaster. On the same lines a 60-Yr old investor may have considerable appetite for equities (at Personalfn we have investors in this category) and may want to invest more than the 40 per cent that the formula permits him.
6) The above point does not mean that there is absolutely no link between risk appetite and age. While it may not be true in every case, investor appetite for risk does decline with an increase in age. This is because a) as investors age, they really can't tolerate sharp dips in their investments; it upsets them and makes them nervous. And b) at an advanced age, investors are usually most concerned about planning for retirement. Since equities can be volatile over the short-term it is advisable to shift a majority of assets from equity to debt, as the investor approaches retirement age.
WOW manish9724,
Quite a large post. Why didn't you create a hub instead?
Would make a great hub, but to the point that investing is risk. I am studying options trading strategies and have created a hubpage, with a bunch of articles, some you might find interesting is evaluating risk in the stock market.
When the banking crisis finally blows up, then you'll seperate those who deal whit risk and those who don't. Please don't believe what the government is telling us, have a few bucks on hand for the opportunity.
http://hubpages.com/hub/Options-Trading … o-Advanced
Blaine561
This was a very interesting article about risk. The old phrase buy the rumor sell the news certainly applies here.
Also there is what is known as the efficient market principle which says over a period of time a basket full of equities will start averaging the general market.
There are many different market timers. Most people in market timing would be termed counter trend swing traders. When we are timing the market, we are looking for a shift in the trend. This is often done by either people trading on fundamental events like earnings and news. Many people trade the charts looking for the next break out or failure.
I however am a firm beleiver in some sort of trading even if a person is call himself or herself an investor. We have to pare our portfolios from time to time. A person cannot hold forever. When it is bad sell it. When it is doing well buy it. This is the theory of Bill Oneil who is a very well regarded trader.
The bottom line is we have to ask ourselves what our goals are. That defines our risk. When we buy a car there is certainly a risk that we could have bought it cheaper at another dealer. So what is right. It depends on what our goal is. If one wants to truely define these goals, they have to define risk and reward stochastically.
Lastly, a person needs to do their own study on the market. I have to say that they shouldn't let the media etc. define where to invest because the rest of the market will certainly be buying the rumor and selling the news.
Cheers,
Ben
by young inv 16 years ago
Hello everyone , im 18 and am learning to be a carpenter in my second year , I have recently become interested in investing money i have saved into something , i come up with theories at work about why such and such is a great place to invest my money , but before i take a leap , i need to know...
by alexd181 15 years ago
I'm looking for some advice from anyone who has done investing or personal finance planning before. If you had a 5-figure sum of money and wanted to grow that amount into more what would be the best way to utilize it? Investments seem very risky, especially for someone who knows little about the...
by Ben Evans 14 years ago
Many people may think that I am a gold and silver bear (looking for price to go down). I am not and both gold and silver could keep going up.The problem is there is a lot of risk right now in precious metals and the market could drop precipitously in a wink. I hear a lot of people talk...
by TimTurner 14 years ago
The stock market has risen about 15% in the last 3 months and about 80% in the last 8 months. Seriously?We are still losing close to 200,000 jobs a month and small businesses are hurting. The economic data is very mixed. The ONLY reason why the last quarter looked so good was...
by ngureco 14 years ago
Are There Workable Investment Plans In Real Estate For People With Small Money?
by Keith James Kennedy 10 years ago
What is the easiest way to invest your money?
Copyright © 2025 The Arena Media Brands, LLC and respective content providers on this website. HubPages® is a registered trademark of The Arena Platform, Inc. Other product and company names shown may be trademarks of their respective owners. The Arena Media Brands, LLC and respective content providers to this website may receive compensation for some links to products and services on this website.
Copyright © 2025 Maven Media Brands, LLC and respective owners.
As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.
For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://corp.maven.io/privacy-policy
Show DetailsNecessary | |
---|---|
HubPages Device ID | This is used to identify particular browsers or devices when the access the service, and is used for security reasons. |
Login | This is necessary to sign in to the HubPages Service. |
Google Recaptcha | This is used to prevent bots and spam. (Privacy Policy) |
Akismet | This is used to detect comment spam. (Privacy Policy) |
HubPages Google Analytics | This is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy) |
HubPages Traffic Pixel | This is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized. |
Amazon Web Services | This is a cloud services platform that we used to host our service. (Privacy Policy) |
Cloudflare | This is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy) |
Google Hosted Libraries | Javascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy) |
Features | |
---|---|
Google Custom Search | This is feature allows you to search the site. (Privacy Policy) |
Google Maps | Some articles have Google Maps embedded in them. (Privacy Policy) |
Google Charts | This is used to display charts and graphs on articles and the author center. (Privacy Policy) |
Google AdSense Host API | This service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy) |
Google YouTube | Some articles have YouTube videos embedded in them. (Privacy Policy) |
Vimeo | Some articles have Vimeo videos embedded in them. (Privacy Policy) |
Paypal | This is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy) |
Facebook Login | You can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy) |
Maven | This supports the Maven widget and search functionality. (Privacy Policy) |
Marketing | |
---|---|
Google AdSense | This is an ad network. (Privacy Policy) |
Google DoubleClick | Google provides ad serving technology and runs an ad network. (Privacy Policy) |
Index Exchange | This is an ad network. (Privacy Policy) |
Sovrn | This is an ad network. (Privacy Policy) |
Facebook Ads | This is an ad network. (Privacy Policy) |
Amazon Unified Ad Marketplace | This is an ad network. (Privacy Policy) |
AppNexus | This is an ad network. (Privacy Policy) |
Openx | This is an ad network. (Privacy Policy) |
Rubicon Project | This is an ad network. (Privacy Policy) |
TripleLift | This is an ad network. (Privacy Policy) |
Say Media | We partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy) |
Remarketing Pixels | We may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites. |
Conversion Tracking Pixels | We may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service. |
Statistics | |
---|---|
Author Google Analytics | This is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy) |
Comscore | ComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy) |
Amazon Tracking Pixel | Some articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy) |
Clicksco | This is a data management platform studying reader behavior (Privacy Policy) |