Risk is Manageable: Actively Managing Risk

Risk avoidance strategy:  Actively Managing Risk

This is primarily a trader's approach - and a key to Soros's success.

Managing risk is very different from reducing risk.  If you have reduced risk sufficiently, you can go home and go to sleep.  Or take a long vacation.

Actively managing risk requires full-focused attention to constantly monitor the market (sometimes minute-by-minute); and the ability to act instantly with total dispassion when it's time to change course (when a mistake is recognised, or when a current strategy is running its course).

Soro's ability to handle risk was "imprinted" on him during the Nazi occupation of Budapest, when the daily risk he faced was death.

His father, being a Master Survivor, taught him the three rules of risk which still guide him today:
1.  It's okay to take risks.
2.  When taking a risk, never bet the ranch.
3.  Always be prepared to beat a hasty retreat.

Returns are the reward you receive for taking investment risk.

While most evident when markets are falling, threat is ever-present. However, it’s not something you want to avoid totally because without risk, you won’t be able to grow your wealth sufficiently over the long term to achieve your “financial goals”. And if returns are the reward you receive for taking investment risk, logic follows that the higher long-term returns usually come from investments with more risk (eg stocks).

http://nsestocktips.in/why-do-i-need-to-take-investment-risk/

Note: 

Over the long term, cash/term deposits are really risky.  The buying power of these decline due to inflation.

The dictum, you need to take higher risks to get higher returns is generally true.  However, the smarter investors also realise there are occasions when an investment is available at low risk with a potential of high return, especially when a good company is being sold at low prices not due to any fundamental reasons.

Quantifying Uncertainty and Risk

Managing Risk - Some Simple Rules

Managing Risk

Investors can manage their risk in picking individual stocks by following some simple rules:

•  Require that the company have at least five years of financial history. Younger firms haven’t developed enough of a track record for assessing management performance.
•  Study only companies that have proven they can make money. Someone who invests in a company that has never reported earnings is speculating, not investing.
•  Understand the possible risk and reward of owning a stock.
•  Diversify your portfolio. Even if you’ve done your homework on every holding using all the information you need to make an informed decision, you’ll still make mistakes. If you have a good-size basket of stocks, however, you’ll also have some stocks that perform much better than expected.
 
Besides investing in high-quality growth stocks and diversifying your portfolio, two other simple principles can help you build wealth over the long term. 

• First, reinvest all your dividends and earnings. 
• Second, invest regularly in both good markets and bad; this is often called dollar-cost averaging.

 
The type of analysis outlined provides a lot of the information fundamental investors need to determine whether a stock is a suitable investment. But not everything. Reading annual reports, listening to conference calls and viewing company presentations will help you form a fuller picture of the company.
    
In today’s unpredictable, volatile market, fundamental analysis is even more important than usual. But for an investor using a simple, straightforward methodology that focuses on the long term, these are also times of great opportunity.

Strategies and Systems for Managing Investment Risk

http://www.slideshare.net/Ijeoma_Odeigah/CACGMTInvestors-Conf

Unlike return, risk is no more quantifiable at the end of an investment than it was at its beginning.

While security analysts attempt to determine with precision the risk and return of investments, events alone accomplish that.

Unlike return, however, risk is no more quantifiable at the end of an investment than it was at its beginning.

Risk simply cannot be described by a single number.  

Intuitively we understand that risk varies from investment to investment:  a government bond is not as risky as the stock of a high-technology company. But investments do not provide information about the risks the way food packages provide nutritional data.

Rather, risk is a perception in each investor's mind that results from analysis of the probability and amount of potential loss from an investment.

• If exploratory oil well proves to be a dry hole, it is called risky.  If a bond defaults or a stock plunges in price, they are called risky.  
• But if the well is a gusher, the bond matures on schedule, and the stock rallies strongly, can we say they weren't risky when the investment was made?  

Not at all.  The point is, in most cases no more is known about the risk of an investment after it is concluded than was known when it was made. 


There are only a few things investors can do to counteract risk:

• diversify adequately, 
• hedge when appropriate, and 
• invest with a margin of safety.  

It is precisely because we do not and cannot know all the risks of an investment that we strive to invest at a discount.  The bargain element helps to provide a cushion for when things go wrong.

Warren Buffett - There is Only One Type of Investment Risk

Five investment hazards

Five investment hazards
After HSBC is fined for mis-selling investment bonds, we look at the products that tempt buyers to take inappropriate risks.

Investment hazards to avoid Photo: Alamy

By Emma Simon

7:00AM GMT 10 Dec 2011

As we draw closer to the ban on commission payments on financial products, which will take effect in 2013, there is growing concern about a rise in the mis-selling of products and fears that some advisers and salesmen are grabbing what they can now.

"I've never seen so many cases of poor advice as I have in the last six months – from advisers 'churning' pension plans to selling unregulated products such as overseas property investments," said Philippa Gee of Philippa Gee Wealth Management. In some cases, she said, advisers were pocketing between 8pc and 10pc of the investment.

"We never see clients who have been mis-sold a National Savings product or a cheap tracker fund," said Ms Gee. "Inevitably, they've been sold a product they don't fully understand and are taking too much risk with their money. But the adviser has received a generous commission fee for it."

Alarm bells should ring if any adviser recommends a product where there is a toxic mix of high charges, commissions and complex terms. This doesn't mean that there aren't certain cases where such products may be appropriate. But evidence suggests that these are few and far between. Despite this, such products are sold to thousands of consumers each year.

With less scrupulous advisers making hay while they can, and the difficult investment environment perhaps tempting consumers to take risks, we look at five products where you should always think twice before signing on the dotted line.

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Investment bonds

These made headlines this week when HSBC was fined £10.3m for selling bonds to elderly customers to pay nursing home fees. Regulators ruled that the bonds were mis-sold, given that the customers' average age was 83 and that there were penalties on withdrawals within five years, as well as a degree of investment risk.

These bonds aren't sold just to people needing long-term care. They are routinely offered to those with a sizeable cash sum to invest, whether they're saving for retirement or supplementing a pension. Ms Gee said: "Whenever I see a customer who's been ripped off, they've almost always been sold an investment bond."

These bonds are typically sold by insurers and allow customers to invest in a range of underlying funds. Their main advantage is that investors can withdraw 5pc of their capital each year without incurring a tax charge. But if the investment growth is less than this, capital can quickly deplete.

Most people are investing tens of thousands of pounds in these bonds (the average investment with HSBC was £115,000) and advisers earn commission of 6pc to 8pc. Investors should ask whether a diversified spread of low-cost equity or fixed-interest funds would be better. Ms Gee said: "Undoubtedly these bonds are oversold. I've advised hundreds of clients, but there's only one case I can think of where this was the most suitable product."

Structured products

These purport to offer a simple solution to nervous investors: get exposure to equity returns without putting your money at risk. Sadly, you will get far less than the market return (most investors don't get dividends, for example) and your capital could still be at risk.

Behind this persuasive "sell" are complex products that rely on derivatives and expose you to counterparty risk. Before signing up, make sure you are clear what the risks are and what return you will get. Santander recently sold "guaranteed" bonds which, it later admitted, weren't fully guaranteed, because of counterparty risk.

As with many types of investment, it's a mixed bag, with good, bad and downright ugly versions. Some structured deposits will be covered by the Financial Services Compensation Scheme (FSCS), so even if the bank selling it, or the counterparty underwriting the deal, went bust, up to £85,000 of your money would be protected. Others are "structured investments" where money can fall at twice the rate of the stock market in certain conditions. Always ask what the downside risk is, both in terms of market falls and the unlikely event of a bank backing it going bust.

"If you are not happy with stock market risk, I would not advise being in the stock market at all," said Ms Gee. "A well-diversified portfolio can often be a better way of managing such risks."

Multi-manager funds

Here, investors are paying a double layer of charges, often without any significant boost to performance. David Norman, the joint chief executive of TCF Investment, pointed out that the typical TER (total expense ratio) on unit trusts was 1.7pc, but on a multi-manager fund the average was 2.3pc, with many funds charging closer to 3pc.

These figures don't include dealing costs or any upfront fees. Some multi-managers don't include the charges on exchange-traded funds either, meaning the published TER may bear little resemblance to the charges deducted from your fund every year.

"Long-term investors are looking to beat inflation," said Mr Norman. "Historically, equities deliver 4.5pc more than gilts. But if you are paying more than 3pc to get a 4.5pc return, it's like trying to go up the down escalator."

These aren't just niche products, aimed solely at high-net-worth investors. Increasingly, these are the default options offered by a banks, including HSBC, Santander and RBS. Mr Norman added: "The principle of diversification is good, so these funds seem a simple, sensible option. But in a low-return environment it's important to keep an eye on costs. Most of these funds are charging too much."

Inflation-linked bonds

Popular at present are bonds where returns are linked to the retail prices index, rather than the stock market. With RPI now standing at 5.4pc and most banks paying less than 2pc, it's not hard to see why they are selling well. But investors should ensure they understand the more complex terms and conditions. If an account pays RPI plus 1pc, this does not mean you get 6.4pc today. Most are five-year accounts, and the return will be the difference in prices between now and the maturity date. Many people are expecting inflation to fall next year, once the rise in VAT drops out of the year-on-year calculation. As with structured products, there may be counterparty risks as well, although most are "structured deposits" that will be covered by the FSCS.

Exchange-traded funds (ETFs)

ETFs don't pay commission and have very low charges. So how can consumers go wrong? Sadly, they are far from simple products. There are physical ETFs, where the manager holds the shares or commodities of the index being tracked. But there are also synthetic versions, where there can be tracking errors and problems with liquidity if too many holders try to sell quickly. Many of these rely on complex derivatives. Worse, some offer "geared exposure", where the fund borrows to boost returns – but this can magnify losses if the market is against you.

Richard Saunders, the chief executive of the Investment Management Association, warned customers to make sure they knew what type of ETF they were buying. The term ETF is often used to describe their riskier cousins, known as exchange-traded products (ETPs), which don't offer the same level of investor protection. Investors should also ensure they look at all charges. The iShares FTSE 100 ETF has an expense ratio of only 0.4pc but annual platform charges make it more expensive than the Fidelity Moneybuilder UK Index fund or the Vanguard FTSE UK Equity Index fund.

Gary Shaughnessy of Fidelity said: "Fees reduce the value of your investments, so everyone should be clear about what they are paying. It's like deciding to fly with a flagship airline or its no-frills rival. There's more to the comparison than the eye-catching price in the advert. If you've been stung by extra charges for baggage, checking in and so on, you know that what matters is the total cost."


http://www.telegraph.co.uk/finance/personalfinance/investing/8946740/Five-investment-hazards.html

Ignore shares and get poorer.

Diary of a private investor: ignore shares and get poorer
Our private investor is back - and he says that savers who are prepared to take some risk will prosper.

Despite the Gulf of Mexico oil spill last year, BP shares are doing well Photo: PA

By James Batholomew

10:51AM BST 06 Jun 2011

After the glorious year of 2010 - for the stock market anyway - this year has, so far, been a damp squib. First it was up, then it relapsed, then it rose once more before retreating again. As I write, it is within 2pc of where it started.

As Lady Bracknell said in The Importance of Being Earnest, "this shilly-shallying is absurd". Which is it to be? Will shares finally rise or fall?

On the bearish side, I'm told, by people who ought to know, that Greece is bust, whatever the politicians say. Another well-placed individual has the same opinion about Ireland.

If either is right, shares could fall heavily on the day the default is announced. Some people say "it is already in the price", but I doubt it.

On the other hand, shares still look good value. I own some in BP which, at 458p, stands at a mere 6.8 times forecast earnings for 2011.

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Its adventures in Russia do worry me a bit and, of course, the shadow of the disaster in the Gulf of Mexico still hangs over it. But rarely in its history have the shares been treated with such disdain.

Professional and lifelong investors are now generally back in the stock market. But many private individuals are still holding back.

Over the past few years, I've talked to quite a few people about their investments and found they can be divided into four sorts.

The first thinks shares are too risky. They remain almost entirely in cash. In some cases they have good reason. Some have a limited amount of money and a very specific thing - such as school fees - which they want to be sure they can pay.

Others argue that shares are unpredictable and they don't know anything about them. Better to keep the money safe in the bank. These people have their reasons. But over the long term, I've seen so many of this sort, who were once well off, become very gradually much less so. I knew the daughter of a Seventies multi-millionaire who inherited her fair share. She kept the money in a building society and is now, frankly, just getting by. It's frustrating. She could have stayed rich.

The second group consists of those who have made quite a bit of money but have not had much time or interest in managing it. They were then persuaded by persistent, charming salesmen to invest in certain funds. For these salesmen, nothing was too much trouble. They visited them in their homes. They brought wonderful, sophisticated brochures and "personalised" recommendations.

The untold story which the salesmen never quite got around to explaining in detail was the full extent of the commissions and expenses involved. The people in this group have generally had a pretty thin time of it over the past dozen years.

The FTSE 100 is still rather lower than it was in January 2000, and all those commissions have eaten a substantial hole in the dividend income.

The third sort are thrill-seekers. To be honest, I know only one person in this group. There was a time when he got very excited about shares and was dealing on an hourly basis, following recommendations from a broker. After initial success, he lost a bundle and decided to give it all up.

Long-term, persistent portfolio investors are the fourth group. They have built up experience and understanding. They tend to have done best.

But where does that leave the sort of person who has other things to do and does not want to spend time building up experience in shares?

My flippant answer would be "poorer". You make your choices and live with the consequences. Trying to be more helpful, let me suggest this: how about putting, say, 15pc of free cash in a selection of lowest-possible-cost tracker funds? And then increasing the amount each year up to a level with which you are comfortable?

This way, you will not give away a fortune in commission. You will keep most of the dividends. You will not have to worry about selecting individual shares. And you are likely - though not guaranteed - to be richer in 10 years than otherwise. You could go for a mixture of, say, half of the invested amount in a FTSE 250 shares fund, a fifth in a Far East fund, another fifth in a US fund and a 10th in an emerging markets fund.

http://www.telegraph.co.uk/finance/personalfinance/investing/shares/8558975/Diary-of-a-private-investor-ignore-shares-and-get-poorer.html

Risk versus Safety

Learn to Manage Risk

Several investors clamour for risk-free products, assurances, guarantees and promises. But just as we do not have perfect spouses and perfect jobs in the real world, we don't have risk-free investment products as well. So, we must understand and manage risk in our investments.

We all invest our capital in an enterprise or a business activity. The entity with which we entrust our capital uses it to create assets. The primary source of business risk is that despite the assets being managed well, their performance is subject to multiple, unknown factors . The ability of the enterprise to service and return our capital is impacted by these risk factors. If a bank deposit is seen by investors as safe and risk-free , this comes is due to the the bank's capital to bear any risk arising from the assets it has funded with those deposits.

The only other way to ensure that an investment is risk-free is to back it by sovereign guarantee. The government is not expected to default because it can raise taxes, borrow internationally, or in the worst case, print currency notes. However, the Indian government no longer guarantees any investment product other than its own borrowings through the issuance of government securities, for funding the deficit in its annual income and expenditure. The products offered under the National Savings Schemes are the only exception.

To the investor who is seeking safety, government bonds and savings schemes are the first choice. However , the returns from these products may be quite low, exposing the investor to inflation risk, thereby making it unsuitbale for long-term investors. The investors who seek fixed return and relative safety of principal can invest in deposits, bonds and certificates issued by borrowers such as banks and companies. The risk of default is inherent in these instruments. It can be managed only by choosing and monitoring the quality of assets of these businesses and the adequacy of equity capital to bear those risks. Credit rating agencies offer rating services to gauge these risks. However, investors may still face the risk of illiquidity of such investments.

The investors who are willing to take on business risks by directly investing in equity of enterprises bear the risk arising from the changing quality of assets. They can take this risk only if they are provided adequate , accurate and complete information about how the assets are performing. They should be able to assess their business risk on a continuous basis and quit if they are uncomfortable with the changing levels of risk. This is why equity investors can sell their equity in a stock market where it is listed. But in this case, they are exposed to the market risk. Every investment is exposed to risk and each of these is of a different nature. If equity bears direct business risk, in case of debt, it is of an indirect nature as a possible default. If non-government debt is exposed to default risk, government debt is open to inflation risk. The only time-tested strategy to manage investment risks is diversification. Holding assets that are exposed to different risk factors reduces the overall risk of the investment portfolio. Rather than running away from risk, we must understand and use it to our advantage.

The author is MD, Centre for Investment Education and Learning, and can be reached at uma.shashikant@ ciel.co.in

Do yourself a favour, invest in your financial education before you invest in the markets

"Risk comes from not knowing what you are doing." 

Risk can be alleviated with proper education and experience.  This is the same process that you must commit to undertake when you decide to invest in any market.  First and foremost, you must get yourself educated.

It is strange that most parents would not think twice to pay high school fees to send their kids to university, when there is no real guarantee that they will succeed in life after getting their degree.  However, when it comes to paying for financial education, where there is a chance they can lose all of the kids' education funds, many people shy away because of the price.  Instead, they would rather risk their hard earned money in a market or instrument that they have little knowledge of, or worse, investing based on rumours or tips from various unverified sources.

Most people are attracted by the myth of quick, easy money from investing (or trading) but fail to understand that it takes a lot of hard work to be successful.  Everyone equates being a doctor or lawyer to earning lots of money.  But it is also common understanding that to be a doctor or a lawyer requires one to put in many years of education and practice before one can be successful.  Ask anyone about his or her current job and you would most likely get the same response that hard work is the norm.  How then can it be different for investing (and trading)?

"Risk comes from not knowing what you are doing" - a famous quote from Warren Buffett.  
It sounds simplistic, but it epitomises the real meaning of the work "Risk".

Any instrument, be it stocks or forex will be dangerous if you don't know what you are doing.  it is not the instrument but the level of the investor's understanding of the instrument and the market that determines his risk level.  So, do yourself a favour, invest in your financial education before you invest in the markets. 

Here is another quote from Mr. Buffett:  "The most important investment you can make is in yourself.."

The Risk is Not in The Car; It is the Driver Behind The Wheel.

It would be a risky situation if a person decides to drive a car without having undergone any form of training.  It is the person's lack of knowledge and skill that makes the situation risky and not the car.

Similarly, if someone wants to invest (or trade) in a particular instrument but has not undergone any form of training, this person would be assuming a higher risk, and it has nothing to do with the instrument.  It is often the lack of knowledge and skill that makes investing (and trading) risky and not the instrument itself.


What is risk in the context of investing?

Risk is a quantifiable entity.
People associate risk with uncertainty in outcome or expected return.  A fixed deposit gives an expected return that is certain but not stocks.
People associate risk with volatility.  Yes, this too can be risky for those who do not understand volatility and who fall folly to it, rather than taking advantage of it.


Risk in investing is thus generally defined as:  


"The quantifiable likelihood (probability) of loss or less-than-expected returns."  
The keyword here is uncertainty in outcome or expected returns.

How to be a good investor?

To be a good investor (and trader), one must first seek knowledge about the instrument that one is going to invest in (or to trade).  It is similar to taking on a new job.

• First, you must learn what your new role is all about, what kind of tools are there to help you in your everyday routines, what are the skill sets needed to perform your new job properly, etc.  
• After that, once you have acquired the knowledge and learnt the skills required, you still need a period of constant practice to apply your newly acquired knowledge and hone your new skills.  
• It is only after having practised for a sustained period of time before one is able to get the "feel" of the job and perhaps do it with ease and confidence.

Risk comes from NOT knowing what you are doing.
Enter at your own risk.

Redefining Investor Risk

by Troy Adkins 

You have probably been told by many financial advisors that your risk tolerance should be a function of your investment time horizon. This belief is touted by almost everyone in the financial services industry, because it is predominately accepted that if you plan to invest for a long period of time, you can make more risky investments. However, before blindly accepting this theory as factual truth, let's look at four ways in which risk can be defined. After thinking about risk from these four different perspectives, you may reach a different conclusion about investing. (Forget the clichés and uncover how much volatility you can really stand. To learn more, see Personalizing Risk Tolerance.)

Risk Theory No.1: Risk is Reduced if You Have More Time to Recoup Your Losses
Some people believe that if you have a long time horizon, you can take on more risk, because if something goes wrong with your investment, you will have time to recoup your losses. When risk is looked at in this manner, risk does indeed decrease as the time horizon increases. However, if you accept this definition of risk, it is recommended that you keep track of the loss on your investment, as well as the opportunity cost that you gave up by not investing in a risk free security. This is important because you need to know not only how long it will take you to recoup the loss on your investment, but also how long it will take you to recoup the loss associated with not investing in a product that can generate a guaranteed rate of return, such as a government bond.

Risk Theory No.2: A Longer Time Horizon Decreases Risk by Reducing the Standard Deviation of the Investment
You may have also heard that risk decreases as the time horizon increases, because the standard deviation of an investment's compounded average annual return decreases as the time horizon increases, due to mean reversions. This definition of risk is based on two important statistical theories. The first theory is known as the law of large numbers, which states that the likelihood of an investor's actual average return achieving its long run historical average return increases as the time horizon increases – basically, the larger the sample size, the more likely the average results are to occur. The second theory is the central limit theorem of probability theory, which states that as the sample size increases, which in this context means as the time horizon increases, the sampling distribution of sample means approaches that of a normal distribution.

You may have to ponder theses concepts for a period of time before you comprehend their implications about investing. However, the law of large numbers simply implies that the dispersion of returns around an investment's expected return will decrease as the time horizon increases. If this concept is true, then risk must also decrease as the time horizon increases, because in this case, dispersion, measured by variation around the mean, is the measure of risk. Moving one step further, the practical implications of the central limit theorem of probability theory stipulates that if an investment has a standard deviation of 20% for the one-year period, its volatility would be reduced to its expected value as time increases. As you can see from these examples, when the law of large numbers and the central limit theorem of probability theory are taken into account, risk, as measured by standard deviation, does indeed appear to decrease as the time horizon is lengthened.

Unfortunately, the application of these theories is not directly applicable in the investment world, because the law of large number requires too many years of investing before the theory would have any real world implications. Moreover, the central limit theorem of probability theory does not apply in this context because empirical evidence shows that a constant standard deviation is an inaccurate measure of investment risk, due to the fact that investment performance, is typically skewed and exhibits kurtosis. This in turn means that investment performance is not normally distributed, which in turn nullifies the central limit theorem of probability theory. In addition, investment performance is typically subject to heteroskedasticity, which in turn greatly hinders the usefulness of using standard deviation as a measure risk. Given these problems, one should not postulate that risk is reduced by time, at least not based on the premise of these two theories. (For more information on how statistics can help you invest, check out Stock Market Risk: Wagging The Tails.)

An additional problem occurs when investment risk is measured using standard deviation, as it is based on the position that you will make a one-time investment and hold that exact investment over the length of the time horizon. Given that most investors employ dollar-cost averaging strategies that entail ongoing periodic investment contributions, the theories do not apply. This is because every time a new investment contribution is made, that portion is subject to another standard deviation than the rest of that investment. In addition, most investors tend to use investment products such as mutual funds, and these types of products constantly change their underlying securities over time. As a result, the underlying concepts associated with these theories do not apply when investing.

Risk Theory No.3: Risk Increases as the Time Horizon Increases
If you define risk as the probability of having an ending value that is close to what you expect to have at a certain point in time, then risk actually does increase as the time horizon increases. This phenomenon is attributed to the fact that the magnitude of potential losses increases as the time horizon increases, and this relationship is properly captured when measuring risk by using continuously compounded total returns. Since most investors are concerned about the probability of having a certain amount of money at a certain period of time, given a specific portfolio allocation, it seems logical to measure risk in this manner.

Based on Monte Carlo simulation observational analysis, a greater dispersion in potential portfolio outcomes manifests itself as both the probability up and down movements built into the simulation increase, and as the time horizon lengthens. Monte Carlo simulation will generate this outcome because financial market returns are uncertain, and therefore the range of returns on either side of the median projected return can be magnified due to compounding multi year effects. Furthermore, a number of good years can quickly be wiped out by a bad year.

Risk Theory No.4: The Relationship Between Risk and Time from the Standpoint of Common Sense
Moving away from academic theory, common sense would suggest that the risk of any investment increases as the length of the time horizon increases simply because future events are hard to forecast. To prove this point, you can look at the list of companies that made up the Dow Jones Industrial Average back when it was formed in 1896. What you will find is that only one company that was part of the index in 1896 is still a component of the index today. That company is General Electric. The other companies have been bought out, broken up by the government, removed by the Dow Jones Index Committee or have gone out of business.

More current examples that support this empirical position are the recent demise of Lehman Brothers and Bear Sterns. Both of these companies were well established Wall Street banks, yet their operational and business risks ultimately led them into bankruptcy. Given these examples, one should surmise that time does not reduce the unsystematic risk associated with investing. (This company survived many financial crises in its long history. Find out what finally drove it to bankruptcy. Read Case Study: The Collapse of Lehman Brothers.)

Moving away from a historical view of the relationship between risk and time to a view that may help you understand the true relationship between risk and time, ask yourself two simple questions: First, "How much do you think an ounce of gold will cost at the end of this year?" Second, "How much do you think an ounce of gold will cost 30 years from now?" It should be obvious that there is much more risk in trying to accurately estimate how much gold will cost in the distant future, because there are a multitude of potential factors that may have a compounded impact on the price of gold over time.

Conclusion
Empirical examples such as these make a strong case that time does not reduce risk. Given this position, investors should reach a very important conclusion when looking at the relationship between risk and time from the standpoint of investing. You cannot reduce your risk by lengthening your time horizon. Therefore, the only way you can mitigate the impact of unsystematic risk, is by developing a broadly diversified portfolio.

by Troy Adkins (Contact Author | Biography)

Mr. Adkins is a senior investment analyst with a global tactical asset management firm. He works and resides in New York City. He has a diverse background and more than 10 years of investment experience.

Filed Under: Investing Basics, Investment

http://www.investopedia.com/articles/trading/10/investors-need-to-know-risk-time.asp

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The interaction between your risks and your time horizon influ...

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The interaction between your risks and your time horizon influences every investment decision you make, whether you know it or not. Learn the basics here. Read: Redefining Investor Risk

Don't be afraid of risk. Learn how to manage it.

Don't be afraid of risk. You will face some kind of risk no matter what you do with your money. Fear of risk can sometimes paralyze your investing. You end up watching your money lose value solely because you missed investment opportunities and let the money sit in a safe savings account, earning less interest than the inflation rate.

The least you need to know:

1. Get to know the types of risks you face as  a value investor, but don't be afraid of them.
2. No investor can avoid risk, but you can learn how to manage it.
3. Time can heal many investment woes, as long as you have the patience to wait out an investment storm.

Are you a risk-hungry investor?

Kavita Sriram, ET Bureau

Over the past few weeks, optimism has clouded the markets. The Sensex thrilled the investors as it zoomed past the 19,500 mark. It has even propelled the pessimists and risk-averse to have another look at their portfolio.

What are the options before an investor who is ready to take risks in these bull market conditions? There are numerous avenues for the aggressive investor to churn out profits. Investors wait in anticipation of the Sensex and Nifty to blaze past the 20,000 and 6,000 levels respectively. Based on the risk and reward ratio, that is, the ratio of expected returns from an investment to the amount of risk taken to get these returns, an investor can ponder over some alternatives.

Sectors & investment risks

Sector funds, sometimes referred to as thematic funds, sector funds are mutual funds that have restricted focus on a particular industry or sector in the economy. Well-researched and chosen sectors, with a strong growth potential, yield substantial returns. However, in case these sectors go out of favour the loss incurred could be tremendous.

Risk-averse investors must keep away from these volatile funds and look at diversified or balanced funds instead. The banking sector has not disappointed the investor over the past two years. So also the automobile sector that has gained steam since the domestic economy recovered. The agriculture and associated industries are languishing.

Contrarian investing 

Investors in heathcare, FMCG and construction too have little to cheer about. Investors can either put their money in sector funds or invest directly in the equity markets in the sectors that they consider are faring well in the current bull run.

A contrarian investor looks critically at the crowd behavior that he perceives are wrong investment choices. Contrarian investing is explored when the entire market is on an upswing or is falling down. A contrarian buys or sells stocks when most investors appear to be doing the opposite. There is tremendous risk involved in researching and picking up battered stocks that have high intrinsic value.

A contrarian investor scouts for under-valued stocks that are over-looked by the crowd. Since he keeps away from over-heated or hyped markets chased by the crowd, he is safe from the detrimental scenario of markets faring against expectations. This strategy demands extensive fundamental study and stock research as the investor is not working in tandem with other investors.

Building an aggressive portfolio

The investor adopts a portfolio management and asset allocation strategy that tries to maximise returns. Such an aggressive investment strategy attempts to beat the overall market performance at an additional risk.

The portfolio of a risk-taking investor has a substantial exposure to equity and very limited investments in safer debt instruments. Aggressive growth funds aim for high capital gains from its selection of investments in companies that exhibit high growth potential. These funds are volatile and are for investors who seek high risk-returns. They have proven to fare well during economic upswings and growth periods.


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