All investments involve risk, although some investments are riskier than others. At the Brighter Life blog, Kevin Press summarizes the three investment risks that are most important in today’s economy: political risk, currency risk, and interest rate risk.
Read more: Three Investment Risks That Matter Right Now.
At MarketWatch, Chuck Jaffe breaks these investment risks down even further, and identifies some additional risks that reflect your own personal situation, rather than the markets. Examples would be saving for a special occasion, or needing money at a particular time, regardless of when the investment will yield the best return.
While he says that every investor should understand these nine key risks, it’s important to identify your biggest financial worry and protect against that particular risk.
Read more: 9 Financial Risks Everyone Should Understand.
The impact of gender and emotions on risk taking
According to Dr. Lynda Shaw, quoted in The HR Director, male risk taking tends to increase under stress, while female risk taking tends to decrease under stress.
Shaw defines risk as “the potential of losing something of value, weighed against the potential to gain something of value.” She says we need to approach risk with calculated confidence, ask experts for help, learn from mistakes, be open to multiple opportunities, and evaluate the outcome of our decisions.
Read more: Psychology of Risk Management in Business.
Jeff Brown at Main Street says that basing investment choices on one’s philosophy and emotions – a risk tolerance approach – can lead to bad strategy, possibly choosing investments that are too conservative for what’s needed in retirement.
A risk capacity approach, on the other hand, is based on dollars and cents rather than emotions. “It boils down to assessing how much the investor can afford to lose in a market downturn, and how long the investor could afford to wait for a recovery while continuing to spend at the intended level.”
Read more: Stop Thinking About Risk Tolerance, Try Risk Capacity Instead.
After all, says Kris Venne, emotions make awful investment managers. He says investors’ emotions get involved too easily when they have multiple advisors managing different aspects of their investment portfolio. It’s far better, he says, to have one advisor appointed officially as the “quarterback.” Otherwise there is the risk of “an overall poorly designed asset allocation, not representing any one particular measurable benchmark.”
Read more: Emotions Make Awful Investment Managers.
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