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Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
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What Is Risk
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What does risk mean?
Many people think of risk as the likelihood of something going wrong. If they stay home, not much can or will happen. But, if they go on vacation, they could get in a car accident or could get lost. Sure, it’s all safe and good but on the other hand, there’s a definite upside to going on vacation, one is exposed to new things, a different culture and can have a fun and memorable experience.
What about investment risk?
Investing involves risk and it is all about changes in prices. When we talk about investment risk, we are talking about the likelihood of the price of an asset changing and by how much. Price declines and losing money are definitely more painful, but investment risk (just like vacation risk) is really about change in either direction. The riskier an asset, the more likely the price will change and the larger the price change is likely to be.
Assets that are the most likely to go up in price are also the assets that are most likely to go down in price. Cash and cash equivalents such as T-bills and certificates of deposits have low risk, Bonds have more risk. Stocks are even riskier.
Uncertainty also plays a role
Uncertainty is also at play when it comes to investing as all investments carry some risk. Every investment has a number of possible outcomes. The larger the range of outcomes and the more uncertain the likelihood of an outcome, the larger the risk. As investors, we are basically trying to predict the future. The less likely our predictions are, the more uncertain the outcome is and the higher the risk.
Without risk there's no reward
When it comes to investing, risk and reward are closely related. One cannot gain without being invested and the higher the risk one takes, the higher the potential reward. There are different types of investments with different risk and return profiles. Cash and cash equivalents such as T-bills or bank certificates of deposits have low risk but they also have lower return profile than bonds and stocks. Stocks carry more risk than bonds and have a higher return profile as well. As an investor, it is important to understand how much risk you are willing to take and align that to your return expectation.
At some point your investments will go down… maybe even by A LOT!
Make sure you are mentally prepared for this. Whether we are talking about individual assets or markets as a whole, there are times when prices will drop and at times those drops will be extreme. Markets are known to be volatile at times, that’s just the way markets work, downturns are normal. You are better off creating a plan for how to react to and navigate these markets drops now rather than when it happens and you are in the thick of things. Market drops can be unsettling but it is important to have a plan and stick to it. Attempting to time the market (selling positions and hoping to come back before markets rebound) is extremely difficult to get right and can lead to missing out on some of the best days.
Many people think of risk as the likelihood of something going wrong. If they stay home, not much can or will happen. But, if they go on vacation, they could get in a car accident or could get lost. Sure, it’s all safe and good but on the other hand, there’s a definite upside to going on vacation, one is exposed to new things, a different culture and can have a fun and memorable experience.
What about investment risk?
Investing involves risk and it is all about changes in prices. When we talk about investment risk, we are talking about the likelihood of the price of an asset changing and by how much. Price declines and losing money are definitely more painful, but investment risk (just like vacation risk) is really about change in either direction. The riskier an asset, the more likely the price will change and the larger the price change is likely to be.
Assets that are the most likely to go up in price are also the assets that are most likely to go down in price. Cash and cash equivalents such as T-bills and certificates of deposits have low risk, Bonds have more risk. Stocks are even riskier.
Uncertainty also plays a role
Uncertainty is also at play when it comes to investing as all investments carry some risk. Every investment has a number of possible outcomes. The larger the range of outcomes and the more uncertain the likelihood of an outcome, the larger the risk. As investors, we are basically trying to predict the future. The less likely our predictions are, the more uncertain the outcome is and the higher the risk.
Without risk there's no reward
When it comes to investing, risk and reward are closely related. One cannot gain without being invested and the higher the risk one takes, the higher the potential reward. There are different types of investments with different risk and return profiles. Cash and cash equivalents such as T-bills or bank certificates of deposits have low risk but they also have lower return profile than bonds and stocks. Stocks carry more risk than bonds and have a higher return profile as well. As an investor, it is important to understand how much risk you are willing to take and align that to your return expectation.
At some point your investments will go down… maybe even by A LOT!
Make sure you are mentally prepared for this. Whether we are talking about individual assets or markets as a whole, there are times when prices will drop and at times those drops will be extreme. Markets are known to be volatile at times, that’s just the way markets work, downturns are normal. You are better off creating a plan for how to react to and navigate these markets drops now rather than when it happens and you are in the thick of things. Market drops can be unsettling but it is important to have a plan and stick to it. Attempting to time the market (selling positions and hoping to come back before markets rebound) is extremely difficult to get right and can lead to missing out on some of the best days.
Conclusion
As with most things in life, no pain no gain. Investing is risky but historically stock markets tend to go up in the long term (though past performance is no guarantee of future results). Downturns are normal so you should pick investments that are aligned with your goals, financial situation and risk appetite, that way you can better handle risk and navigate choppy markets.Latest Market Insights
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