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Revisiting Investment Risk - Part 1

Risk….the word trips so easily off the tongue but have you really ever considered risk in its entirety, what it really means and more what it really means and more importantly what risks you are exposing yourself to on a regular basis.

Only through understanding, accepting and subsequently taking appropriate measures (and appropriate being the challenge here!) actions can we hope to master risk.

Please note at this stage the use of the word "master" not than the trite reduce/eliminate etc etc that emanate from the lips of all but the most educated and broad thinking "financial professionals" (and I use the word professionals loosely in many cases).

Risk is not the enemy and something to be feared. Rather, risk is to be understood, exploited for the elements that can make the difference for us and ultimately embraced and celebrated. For it is the real truth that should risk not exist we would not grow, we would be absent of some of the most amazing things that have been created by mankind and in this context we would not be able to make money out of trading.

Start with this as a concept, expand your mind beyond the simple potential to lose money and you are not only achieving the aim of reducing the likelihood of that most basic perception of risk but are putting yourself in the position to have sustainable success for a lifetime of investing.

The very nature of entrepreneurship (that's real entrepreneurs not the ones that talk about it a lot, dabble with writing an Ebook, join a Facebook group, even make a website and believe that these actions make them an entrepreneur) is one that accepts risk as described above. So in your journey to become an options entrepreneur (or general share market. Forex trading or whatever your trading preference), you too must accept the above, for it is only this that will enable you to fulfil your investment aspirations.

Let me give you an example to get the risk ball rolling:

  1. There is this entity called the market and one of the vehicles you can use to trade this market is options
  2. You know that some people make money from the trading options
  3. Therefore by not participating you run the risk of not making money
  4. You know that some people lose money from trading options
  5. Therefore if you do participate although you have taken actions to remove the risk of not making money you have exposed yourself to the risk of losing money
  6. You will give yourself a better chance of making money by having the right systems to learn, test, trade and review your actions
  7. By taking these actions you are exposing yourself to the perceived risk of losing time
  8. If you choose to make an effort to short cut and save time you expose not only to the risk of not making money but also increased your exposure to the risk of losing money
  9. OR by investing the time and effort in having those right systems you are increasing the likelihood of making money and therefore mitigating the risk of not making money.

And we haven't even talked about the market moving in either direction yet!!

Yet when we hear about risk, it is this market moving that is spoken about, usually with reference to external factors. i.e. market risk (the whole market moves), sector risk (a particular type of company is effected) or company risk (where an event may happen to a company), and always in the negative.

Yet, from the above, I hope you are beginning to consider that risk is so much more than this and to focus on the "beer-mat" explanations of risk (i.e. that can be written on the back of a beer-mat) and recognise already that risk can be viewed in at least two ways even at a basic level (we will unveil more in later sessions):

  • An actual loss of capital (which is of course the negative) if you are in an there is something adverse happens
  • A loss of potential capital (the other edge of the investing sword) if you are not in and something positive happens.

More importantly and to make reference to a point made before with the example we used, most of risk is NOT not external despite what some would have us believe but internal (sort of convenient to be able to blame something outside for a lack of success hey! - that being you or those you have entrusted to make financial decisions for you). Making choices, exerting effort, and adopting consistently good behaviours when you trade are nothing to do with anything or anyone outside of what you see looking back at you in the mirror.

We will start to explore these internal risks much of which may originate from your "hard-wring" and of course what you CAN start to do about it in the second part of the series.

So I trust that helps to paint a small but significant picture to kick things off in this series with the key messages -

  • Whatever you choose to do or don't do you are exposing yourself to a type of risk.
  • Risk can be external or internal in origin
  • The more acute risks are internal! (i.e. to do with you not what happens around you)

For those of you who are the over-performers and want an activity, get a piece of paper and divide it down the middle. On the right list of the things you have taken on that have resulted in you having a risk event and on the other side all of those opportunities you have missed because you didn't take a risk.

Mike Smith