The world of investment can be very intimidating for the first-timer, and the temptation is to spend lots of time researching and reading about everything in the investment world. It is tempting, but you have to resist this temptation. When I was first starting out in this business, I read a lot about the stock market and did a lot of research. I found out that the following is almost exclusively true:
The US stock market has produced a wide range of returns. There are many exceptions that is a given. But the average return is not very good. If you find yourself investing a large sum of money in the stock market, you should probably retire before 2031. Investment work does not pay very well. Investing in the stock market is risky.
Although there are many exceptions, the majority of the most successful people in the stock market were a bit more cautious. They realized that investing in the stock market is risky and that they don’t need to be as successful as others.
This is what I want to present to you here today. If you are an aspiring investor with a lot of time on your hands, read on! It will be very interesting!
Very few people know how to manage risk. They see the high return numbers in the markets and assume that investing in the stock market will eventually produce good returns. They then invest in it even though they do not understand why the stock market generates such high returns. Then, they read a lot about investing and start to make these risky decisions. If you want to the do the same, you could look here and start learning all about investing.
Why not take the high returns and run? Why not retire and allow yourself to explore your options? Why not remain an investment rookie?
The fundamental reason that the first-time investor loses is that she or he has not prepared properly for risk.
As I see it, there are a number of very simple and easy-to-follow rules that you should follow if you want to be able to handle and have a realistic expectation of the financial world of investing. These simple rules are very powerful and efficient tools for managing risk.
Where risk comes from: “All investment in the financial world is risk.”
The basic concept of risk is that you should think about what the consequences of your decision will be. This is a very simple, but very important, concept for investors to understand. We are going to look at the financial consequences of each investment decision. How do you figure out what happens to you when you invest?
You invest when there is risk involved. As the saying goes, “You cannot choose your parents, but you can choose your environment.” One can choose to invest in a business which will pay you a fair profit. Or one can choose to invest in a business which will not pay you any profit, but will leave you wealthy. What are the outcomes which you would expect?
There are two ways to make decisions about what to invest in. One way is to understand what risks the business is facing. Then you can choose a stock, a mutual fund, or any other investment which will not cause you to lose your money if the business fails.