Risk in Investment and Management of Risk

When we talk about an investment, there will always definitely be a potential risk involved whether it is small or big. It is something that most investors will have to face. For example, if a person simply saves money in their bank account, they will be at risk of losing the value of that money due to inflation which will result in the rising cost of goods.


Therefore, it is inherently important that most investors evaluate first the potential risks of an investment so that they can see whether it is appropriate for them.  You probably have heard the term "high-risk high return". It is quite popular these days so we will ask the question of what it really means to risk. This post will also help you with investment risk management so that you won't lose all your money.

But before that, what is an investment?

Investing is putting a sum of money at the current time expecting that the money will add up in the future.

Many instruments can be used which is legal according to the law for which our money can be invested in. So be wise before making any decision so that you can avoid making the biggest mistake of your life.

Before we invest our money in anything, we must first be able to identify the risks in investments.

The diagram above shows the level of risks as well as a potential return based on investment instruments that are commonly used. As you can see, the higher the risks, the more you will get in return.
The question that comes to mind at the moment is which of these instruments suits best for us.

Identify the objective of an investment?

For you to make a choice, then you will first need to ask yourself what are the objectives of your investments. Are my investments for retirement? children's education? daily expenditure? vacation?

When you have established these objectives, then we can make a proper choice of which instrument is among the best. If we're talking about the short-term, we can choose a riskier instrument. The faster/higher the return of an investment, the riskier it shall be.

For those with smaller capital, it is wise for them to choose an instrument with the least risk since investments are all about using that money and making more in the future.

No money simply means no returns. Thus, it is better to invest your money in a safe place with a lower risk to avoid from putting all your eggs in one basket.

The next question that you need to ask yourself will be how big of a risk are you willing to bear? For you to answer this question, you need to take into account your age and how thick your wallet is.

Age Plays a Role

You can see from above that if you invest at an early age, you are simply taking more risks when compared with when you are older. This is because we have the time to try and error at an early stage. If we ever make any mistake, there is always time to improve ourselves and mend those mistakes. We can try many instruments for investments.

The youth can always invest more money in aggressive types of instruments with higher risks.

In contrast to those elderly with a family, they need to be more careful when making a decision on investments as they also have a commitment that they need to take care of. 

The amount of money that you are willing to put into an investment is crucial since you can either gain or lose. Any sort of mistake made can actually disturb your daily life. More money should be invested in instruments that give a rather stable return. For instance, for Malaysian people, ASB or stocks give decent dividends each year.

Thus, youngsters should focus more on savings before investing any money. The best will be for them to accumulate some money within their first five years after they have started to get an income from a job. On top of that, they could also invest some of their money into gaining more knowledge on each of the investment instruments available out there.

The diagram above shows the relationship between risk and float. Float literally means money that is floating in which we have that can be invested.

For those that invested using instruments that have a high risk like a commodity, a float is essential. A big float will be able to resist us from doing what we call 'Margin Call'. Margin Call means we are forced to get out of this grasp automatically and take a rather huge loss.

With a sufficient amount of float, we can sustain. Even so, we still need to do some research on the correct trend at the moment. Since if we are on the wrong trend and we wouldn't want to cut loss since a float that is as huge as a mountain can also deplete.

Knowledge is key

At the end of the day, before you would want to jump in and start a portfolio in investment, you should first prepare yourself with all the knowledge that is required mentally and physically. You need to read from different sources to compare which ones you think best fit you whether it is paid or not.

You can always attend classes, read e-books, watch Youtube, and even go to seminars where they teach you how to do it right.

There, planning is crucial in the early stage of investments as well as mastering every single instrument available out there. If you are ever short on money then you should accumulate as many assets as you can before setting foot in the world of investments. You should think thoroughly before putting all your money into an investment especially the number of risks that you are willing to bear.

What sort of risks have you gotten in any type of investment?

Source: Forbes

Credit: Mohamad Ali Fudin