Risk Assessment Is The Key To Good Investing

Ask any financial expert why most individual investors don't get rich, and the answers will vary. Some people may be afraid of acting, some may be greedy, and some may lack patience. All of these factors are certainly possible, but he has one factor that trumps them all. That is the inability to assess risk.

Ask several people what they think about the stock market. The answer will probably be something along the lines of, "That's a good way to lose all your money," "It's just a big gamble," or "It's against the little guy."

These same people think nothing of putting their money into a low-interest savings account each year, blithely ignoring the fact that the purchasing power of their money is being wiped out by inflation. Too many investors get caught up in all the negative news spread by the media and ignore the long-term direction of the stock market. Tell Sally and Joe in Middle America that a diversified stock portfolio is safer in the long run than bonds, bank accounts, and gold. They almost certainly won't believe you, especially when markets are volatile like they've been recently or during a recession like the one we saw in 2008.

In general, our risk perception works in exactly the opposite direction. When stocks, real estate, and other asset classes become cheaper and more value-based, we perceive them as more risky because we can lose some and still lose money. To . further increase its value. As the price increases, approaches full market valuation, and becomes more dangerous, many people perceive it to be safer. If people on the street say that stocks are a good buy, that's simply not the case. If the shoe salesman starts giving you storage advice, take your money and run.

Here are five ways to improve your risk assessment skills.

1) Block out the past few days or weeks. Let's see what happens over a period of 1 to 3 years. If you only focus on what's happening this week, you'll be misguided every time. 2) Evaluate all alternatives. There's usually someone making money somewhere. If you don't like the opportunities in the US, look to other countries, including emerging markets. Consider micro-cap and small-cap opportunities that may not necessarily align with the general market direction.

If you wish, look at different asset classes, including real estate, precious metals, and other alternative investments such as commodities and long-short funds. However, please be careful. If everyone loves an asset class, it may not be the best choice. 3) Ask yourself what the worst thing that could happen is. Take control of your financial worries by playing out different scenarios in your head. Will Johnson & Johnson stop selling cotton balls? Will people stop driving cars and consuming petroleum products? 
4) Remember that "riskier" assets may be the most popular. Safety stock is great, but when conditions are bad, it can increase demand and therefore drive prices up. When the economy is weak, the biggest bargains are usually in the small-cap and micro-cap sectors. Purchasing a diversified portfolio of small-cap stocks is less risky than you might think.

Of course, it's possible that any of them will go bankrupt, but not all of them will go bankrupt at the same time, unless this really is the end of the world. If you're too scared of small- and micro-cap stocks, remember that market panic can also cause the prices of classic stocks to fall. Blue-chip stocks may not return as much as the best small-cap stocks, but it's not that difficult to outperform the average bond or short-term bond.

5) Look at facts, not opinions. Read some good books on stock market history and compare the long-term returns of different assets. Look out for seasonal anomalies like year-end tax sales and summer lows. Look at the returns of small and large stocks. Look for things that are almost always true and use them to guide your investments.

Remember principles such as "small and mid-cap stocks tend to outperform large-cap stocks" and "investors who constantly check their portfolios do worse than those who check them once a month.". All you have to do this week is hear what our speakers think. Remember, they need to fill the airwaves with something, and it's not always what you need to hear.

If you watch too much TV or listen to too much water heater chatter, you'll end up investing in exactly the wrong thing at the wrong time. When you panic, check the basics. If your company has little or no debt and is generating positive profits, it's unlikely to go bankrupt anytime soon. If the fundamentals tell a different story than the stock price, wait a while. The two regain harmony. They always do.

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The biggest threat to investors' wallets is inaccurate risk assessment. They buy things that are riskier than they think and give up things that are actually safer. Get better results by focusing on the real facts behind asset performance and filtering out the noise.

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