Understanding Investment Risk

Risk is a part of any investment undertaking.  The difference between getting blindsided by the realization of risk and cashing in on great returns is in properly considering risk when making decisions.  It is imperative to fully appreciate the different types of risks involved in the variety of investment choices we consider. 

The usual concerns about stock prices that are higher than the segment and bond yields that do not measure up are part of the risks players consider.  There are certainly concerns when firms do not meet earnings projections and market volatility threats.  Think “Enron” and the risk of executives cooking the books instantly pops into mind.  Terrorism is not far from any market or investor’s consciousness in the world today either.

The question is what to look for to optimize your returns and still avoid risk. The answer hinges on the definition of risk.  Investors consider the possibility of losing money as the highest risk and consider the investment’s volatility as a measure of risk.  Investors toss that word “volatility” around like we all know what it means, but if you don’t know then it is time to find out.  Volatility is really a statistical measurement of the susceptibility of the market or a security to gain or lose value. A highly volatile market or individual stock is one that has huge bounces in price in a short period of time.  Investments that are very volatile are risky and conversely low volatility translates to low risk.