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Knowing how much risk to take when investing is another challenge. In 2007 and 2008, it was clearly found that the world’s largest bank could not measure the risk of its huge debts (I call this investment, but looking back, it is obviously gambling). If billions of funds in the bank are exposed to risks, neither you nor I can accurately measure the risks.
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The best indicator to reflect risk is expected return or recent return. The higher the expected return, the greater the investment risk. If the 30-year loan interest rate of the U.S. federal government is about 3%, and the interest rate of a bond is 13%, you can immediately judge that this investment is risky. Suppose that the share price of a stock doubled last year. While expecting to double this year, you should also understand that this investment is risky.
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Even if someone tells you that there is an investment with zero risk, and the interest rate is higher than that of US Treasuries, you should understand that there is no investment with zero risk. This is the same for everyone (I know, and certainly for me). It is difficult to comprehensively measure and understand the risks of investment. In 1999, a group of Nobel laureates made a huge investment fund, but it almost brought the global financial system into collapse.
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If you have neither won the Nobel Prize nor have a large number of investment analysts assisted you in investment, it is very simple. Measuring investment risk is also difficult for you. The following guidelines will help you consider how much risk you should take based on your own preferences and actual conditions.
- 1. You can’t avoid all the investment risks, and you don’t need to.
- 2. Make more popular investments that are easy to understand and less unexpected investments that are not easy to understand. For example, many people are doing public funds investing in growth stocks. They can help you understand the risks involved. If you choose the futures options of commodities to take a chance, you will not only have a hard time understanding, but also few people around you to raise risks for you.
- 3. Find out your actual situation. If you are young, you will have many years to make up for your mistakes. Then you can take more risks. But if you are saving money for your fifteen year old children to go to college, you should try to avoid risks.
- 4. The greater the risk, the longer it takes to understand it. Don’t ridiculous think that you can know all the risks and avoid them.
- 5. Use capital leverage cautiously. There are many ways to leverage capital investment. Financial people often say that if you want to improve the potential investment income, you should use other people’s money. For example, the purchase of duplex housing not only has certain risks, but also can bring benefits. If you borrow money from the bank to buy a house, your profits and risks will increase. In theory, the more money you borrow, the higher the return on investment and the higher the risk of failure. There are many ways to take advantage of leverage in financial markets. While increasing returns, they tend to increase risks.
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If you still can’t remember anything after reading this article, remember one thing: most investment risks cannot be accurately measured. Investment must be cautious!