Understand Investment Risk and Prevent Unnecessary Losses

The only way to completely avoid investment risk is to be poor. An aggressive investment risks substantial losses of equity while a conservative investment will likely earn less money than inflation

Investment risk is present in every type of investment from real estate to stocks to futures to mutual funds to bonds:

Mutual Funds
Eighty percent of mutual funds under perform the S&P 500! Is it any wonder that mutual funds are compared to the "Lipper Average" instead of the S&P 500? When the stock market is losing money, the average mutual fund will lose more. In good times, when stocks rise, mutual fund share holders will get lower gains than merely holding on to the stock market indexes. The reason for this is mainly due to mutual funds' management expenses. All mutual funds have management expenses regardless whether they charge commissions or not.

Bonds
Bonds carry equity investment risk when bond holders are forced to sell before term expiration or when issuers go out of business (not likely for big companies or the U.S. government). Bonds also endure "opportunity" investment risk because more money can usually be made in other relatively conservative financial instruments.

Real Estate
Real estate's main investment risk is very low liquidity. Of course, there is also a risk of loss just as with all other financial assets. But if real estate is purchased at an inopportune time it can be very difficult to extricate because sellers set the price. If set too high, potential buyers will be scared off from even taking a look at the property.

Stocks
When a stock is bought, the most that can be lost is the amount of money paid. There are unlimited losses possible, however, for shorting a stock. All of this equity investment risk can be limited through protective stops wherein orders are placed to exit trades if the price goes down or up past a specified price limit. Stocks also may suffer from too low liquidity for those issues that have very small daily volume such as with some penny stocks.

Futures
Futures have similar types of investment risk to stocks - equity and liquidity (when certain futures markets have small daily volume). But futures are highly leveraged (e.g., the 30-year Bond Futures are worth $1,008 per point) so the possible gains and losses are much bigger than for stocks. That makes it imperative to protect futures positions with protective stops so as to define and limit risk. Given limited investment risk, futures have no more risk than stocks but still have the advantage of leveraged gains.


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If you are deathly afraid of investment risk then trading is not for you. Management of investment risk is key. Limiting investment risk is very important. Investment risk can rule your life. Don't let investment risk hurt you. Ride over the waves of investment risk. Confine investment risk to a very small area of your life. Understand investment risk in all its forms. Investment risk during trading turns into fear and greed. Investment risk is real. Investment risk is palpable. Investment risk cannot be avoided. Investment risk is present in every type of investment. Ever time frame of different investments has investment risk.