Top Investing Mistake #5: Not Managing Risk
One of the things that many investors don’t consider is their level of risk. Each investment deal has a risk associated with it, and to some degree that risk can be measured. Sometimes people invest without knowing what they are doing, and these people typically do not consider risk. And sometimes people invest because it is exciting, and these investors often ignore their risk level as well.
Risk can be measured in different ways, depending on the particular investment. Sometimes just asking, “What’s the worst that can happen?” is a good start. And then, “What are the chances that this will happen?” Although these questions do not have precise answers, they begin to quantify the risk involved. Even if we do not arrive at an exact number, just going through the process and considering the risks is important.
Why do people ignore risk? One reason is that investing is a bit different from many other activities. Investing can be a very imprecise process, especially for beginners. They simply have no idea of the risks involved, and don’t find out about them before getting started. In addition, it is possible to make money investing in the short term without ever thinking about risk. This is what happened for millions of people who made money in the real estate bubble, and in the stock market bubble of 2000.
The problem with not measuring risk is that sooner or later the odds catch up with us. Even if the risk of losing money is low, after many investments the chances become high. Even if we make money the first few times, we need to make sure that we are measuring our risk. Otherwise, we could lose a lot more all of a sudden in a future investment.
Another reason that people don’t bother to measure risk is that they enjoy the excitement of not knowing what will happen. These people are not actually investors at all They are gamblers. They fill the casinos in Vegas, and buy lottery tickets. When they look at the possibility of putting their money into a stock or piece of real estate, they are thinking about rolling the dice and getting lucky. Since gambling is a source of fun and excitement for them, they have no interest in analyzing the risks. It would take the fun out of the game.
There are many reasons that people don’t measure risk when they invest. These reasons range from being a beginner to loving the risks of gambling. But without measuring risk we cannot succeed at investing in the long term. That’s why it is critical to be aware of and manage the risks of each investment deal, regardless of whether it is a stock, option, real estate or business.
Related posts:
- Top Investing Mistake #10: Not Finding Your Groove
- Does More Risk Really Mean More Reward?
- Top Investing Mistake #6: Going Big Too Soon
- A Basic Strategy for Successful Investors: Managing Risk
- Top Investing Mistake #3: Listening to People who are Totally Unqualified
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is one of my favorite financial books of all time. It's an allegory about a guy who has a terrible job, and how he overcomes challenges to achieve his dreams.
