- Do you know how you can take calculated risks on your investment opportunities and protect them?
- Are you aware of terms like Risk Analysis, Risk Management, and Risk Parity, which are crucial in investments?
- Have you followed the learnings of some of the leading Investment Gurus and their perception of risks in investing?
A good investor is one, who has knowledge and information laid out in front of him or her before making investment decisions. In the modern world, this is sometimes used interchangeably with ‘Risk Assessment’.
Most experts feel that in order to be successful a balanced approach towards risks needs to be maintained. This not only helps in protecting your investments but also allows you to venture into highly profitable investments.
In this article, we share some insights and discuss some concepts related to risks in investing decisions.
What is Risk- Meaning and Definition
In the world of finance and business, a risk is defined as a chance or probability that determines gains or losses from decisions. These decisions can be investment decisions or policy decisions. As there are many variables, which can affect an outcome, all these are cumulatively termed as risks.
If you are taking a risk, you stand the chance to lose some of your investments, or all of your investments, depending on how bad the outcome is. Experts use many strategies to determine risks. Most notable among them is something, referred to as ‘Standard Risk Deviations’.
This includes relying on past trends, data, analytics, and predicting or estimating future projections. Many argue that while this system or structure is good, it is not full proof. For it does not take into account, factors like global wars, pandemics, or natural disasters.
However, the margin call is what separates great investors from mere investors. They understand and assess the risks (information) and take decisions accordingly.
What is Risk Analysis and can I use it for making future Investments?
In simple words, ‘Risk Analysis’ is the process of taking into account all those factors, which can have a positive or negative impact on your decisions. They majorly include three crucial factors-
- Changes and condition of the corporate or private sector
- How the government of the day is behaving
- Natural, environmental and climactic challenges to decisions
Seasoned financial experts depend on a number of quantitative (data-driven models) as well as qualitative information when making decisions. The starting point of a risk analysis study is listing out what all can go wrong.
All the negative things, which can go wrong are listed and run against a probability metric. This is very similar to the stat you give your grandmother who has a fear of flying (more people die in road accidents annually than in flight crashes).
However, at the end of the day, risk analysis can never be an exact science. This is because you cannot eliminate all probabilities at any time. This has what led to many terming this as more of an art than a scientific exercise.
Low-Risk Investments and High-Risk Investments: what you need to know
If you are someone who is new to investing, you might have heard the terms- low risk and high-risk investments. Experts often suggest that if you are starting out, you should go for low-risk investments, where the returns might be smaller, but the chances of loss are few as well.
Compare this with high-risk investments and you will see that even though the returns promised are huge, the chances of it all going away are also quite substantial. Many investors tend to invest small in high-risk investments and balance out the same by investing heavily in low-risk ones.
The standard for the low-risk investment stands universally accepted at 10% of the returns. However, there is no universal mark, which has been set for high-risk investments.
This is just the nature of how investments can be made. You might not be wrong to think that this is similar to gambling in many ways.
Many people feel that investing in areas like Bitcoin is high-risk. However, that is not the case. You can do a proper risk analysis of investing in Bitcoin by taking help from the Bitcoin Trader Team. Likewise, most investment institutions and hedge-fund managers can show you charts, forecasts, and make predictions for the financial future of the world.
At the end of the day, nothing is written in stone. As an investor, you should try to ensure that your investments stick to the standard deviation metrics at all times.