Investing For Beginners – Free Investment Articles and Tutorials

Once you’ve identified a risk in Step 1, the next step is to understand it. How likely is it that the risk will occur? How severe would the impact be if it did occur? Some risks are likely to happen but have low potential impact (such as cutting yourself while shaving). Others happen only very rarely but carry severe consequences (such as being struck by lightning). In addition, there are risks with a high probability of occurring and severe consequences (lighting a match near gasoline), as well as risks with little chance of occurring and low impact (being rained on in the Sahara desert).


Let’s look at market risk. What’s the likelihood that the value of an investment in a bond or stock mutual fund will fluctuate? The answer is that it’s certain. How much impact might market risk have? Some investments tend to fluctuate in value a great deal, others less so. In general, over long periods of time (10 years or more), investment types with the largest fluctuations show the greatest growth– but, as with every aspect of investing, there are no sure things. An investment with wide price fluctuations can often make sense for a long-term investor but be inappropriate for someone with less time. There are other factors to consider, too, such as how much fluctuation risk you personally feel comfortable taking and what percentage of your assets you’re considering investing.

Once you understand the possible risks, it’s time to move on to Step 3 and look at strategies which can help you control risks. (The key word is control. It’s impossible to eliminate risk, even in guaranteed investments.)

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