Dealing with Risk


There are three basic methods for handling risk:


  1. Avoid it. You can avoid different types of risk by choice. If you don’t play the slot machines you will never experience a loss to the slot machines. If you chose to not buy stocks, then you can eliminate the risk of losing your investment when and if the price of those stocks fall. However, one thing to understand, it is impossible to avoid all forms of risk simultaneously.
  2. Accept it. Before you invest your hard earned money you can determine what the risks might be and compare it to the possible gain. A conservative investor may prefer guaranteed principle investments, but if there is great reward available in a more risky investment that over shadows that risk, even a safety conscience investor may be willing to assume that additional risk.
  3. Minimize it. You can eliminate or reduce risk by transferring that risk to another party. Insurance is used by business and individuals to spread the risk among a large number of exposures. This allows the insurance companies to predict the chance of loss more accurately, thus controlling that loss. Other types of spreading the risk are hedging, used by commodity futures traders to offset potential loss caused by fluctuating prices. There’s also, diversification, which is the concept of owning a variety of investment products in one’s portfolio. Knowing when to implement these strategies is one of the things that makes working with a professional advantageous.

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