Investing: How To Do Risk Analysis?

What does Investing really mean?

“The act of creating more money by bringing your capital in promising assets with the expectation of rewards.”

Investing means putting money in underlying assets today to get more money out of those underlying assets tomorrow. Essentially, it’s a different way to think about making money. Growing up, most of us were taught that we could earn an income only by getting a job and working, and as long as we are working actively, we are making money, but an intelligent person not only earns money from active work but by diverting some of his active income for investing he creates additional passive income which is working for him all the time.

What Isn’t Investing?

“Investing is not speculation.”

Speculation is putting money at risk by betting on an uncertain outcome hoping that you might win money. For example, buying a share of a firm based on a “hot tip” you heard at the parking lot from a friend or a colleague is essentially the same as placing a bet at a casino. True investing requires a thorough analysis of the possible risk of losing money and the reward of achieving expected profits from where you will put your money.

Why Believe In Investing?

“To achieve financial freedom.”

Individuals invest their hard-earned money to increase their financial freedom and sense of security. The secondary reason for most people’s investment decisions is to create the ability to afford the things they want in life. Life becomes more beautiful when you, deep down, feel free from the thought of just surviving in this materialistic world. That is why investing is becoming more of a necessity in today’s life. The days when everyone worked the same job in the same office till retirement and then retired with frugality are gone. Whether you live in Ireland, India, the U.S., or any other country, the cost of living is increasing drastically in the modern materialistic world. Almost without exception, the responsibility of planning for retirement is shifting away from the later years to the earlier years. There is much concern over how our savings will justify our survival over the next 10 or 15 years. Just by planning ahead with suitable investments, you can ensure financial stability during your whole life.

How To Know Right Investment Objective?

Before investing money in any asset or security, an individual must know about a few fundamental investing factors. Generally, the Safety of principal money, present-day income, and capital appreciation are factors that influence an investment decision. They will depend on a person’s age, status in life, and personal condition. A 65-year-old man living using his retirement money is more interested in guarded and stable investments than a 28-year-old business professional would be. Because the older adult needs gains from his investments to hold on for future years, he cannot risk losing his investment in return for quick money.

On the other hand, the young professional has ample time on his side. He can afford to take risks in his lifetime. As investment income isn’t supposed to pay the present-day bills, the young professional can afford to be more aggressive in his investing strategies.

An investor’s financial status will also affect their objectives. A wealthy person will undoubtedly have many different goals than a newly married couple just starting out. For example, to increase his profit for the year, the millionaire might have no problem putting down a hefty amount in a speculative real estate investment. A hundred grand is a small percentage of his overall worth to him. Meanwhile, the couple is concentrating on saving up for a down payment on a house and can’t afford to risk losing their money in a speculative venture. Regardless of the potential returns of a risky investment, speculation is just not appropriate for the young couple.

As a general rule, the shorter your time horizon, the more conservative you should be. For instance, if you are investing primarily for retirement and you are still in your 20s, you still have plenty of time to make up for any losses you might incur along the way. At the same time, if you start when you are young, you don’t have to put huge chunks of your paycheck away every month because you have the power of compounding on your side.

On the other hand, if you are about to retire, it is crucial that you either safeguard the money you have accumulated. Because you will soon be accessing your investments, you don’t want to expose all of your money to volatility – you don’t want to risk losing your investment money in a market slump right before you need to start accessing your assets.

What’s Your Personality?

What’s your style? Do you love instant gratification, cryptocurrency, penny stocks, and the thrill of a risk? Or are you one of those who believes in “Slow and steady wins the race?” while enjoying calmness, stability, and safety?

Peter Lynch, one of the greatest investors, has said that the “key organ for investing is the stomach, not the brain”. In other words, you need to know how much patience you can carry to grow your investments. This is not an exact science. You have to figure it out yourself. As an old maxim says, you should only invest with such risk that you get a good sleep after going to bed at night.

Another personality trait determining your investing path is your desire to research investments. Some people love to analyse the fundamentals of an investment. For an investment in shares of a particular company, they try to analyse the industry in which the company operates, the economic conditions of the business, financial statements, projections, management decisions, and future growth prospects.

Overall, investing is an art. You can considerably make good returns and lower risk just by knowing what you are doing.