‘Risky-ing’ in Investments
SUPPOSE you hold a mining stock, what would you do if the government imposes stringent rules in the mining industry? How about one day a retail stock you hold is not be able to pay its obligations to stakeholders hence declaring bankruptcy? You might be holding an old corporate stock that still has views of accelerating prices and robust operations, but what if innovative competitors come in the picture? The answers may diverge but it will fall into a bottom-line—“You’ll lose,” therefore, risk is in the picture, and as always.
The reality is that inherent to owning a stock, bond or any other investment options are so-called risks. Notwithstanding the rising viewpoint in the Philippine economy that serves as a trigger for investors to invest heavily these days, investing is, but risky, in theory and practice. There will and always be a possibility that your investment drops its value. While there is a probability that your hard-earned money will vanish, there’s also a chance that your investment will increase in value, and that is people’s rationale to invest. Jeopardy to your investment comes from a variety of sources but the end upshot is identical—loss of value. You work hard for your money and now that you want your money to work hard for you, then you should preserve your capital as much as you can.
Bonds may be deemed less risky, but they give relatively lower returns compared to what stocks can provide. The basic knowledge you should know about managing risk is that if you want higher return, you need to take higher risks. In contrast, lower returns possess lower risks. When an offered investment has no risk, be cautious as it may be one of the scams.
But what are then the key measures to risk of a particular underlying?
For bonds, ensure that you check credit status with third- party rating agencies. The ratings reveal the likelihood that the issued bond will pay the interest and return the principal. On the other hand, the value of the stock is determined countless times a day by a series of trades in the market. In fact, there is no perfect established formula or technique to value the stock, whether it is a form of fundamental analysis or technical analysis. If you learn the basics of the stock market, it is about the interaction of supply and demand—what market participant will pay at a single moment in time. Financial statements and business expansions may not even be sufficient tools in valuing stock. There is also a principle that the market is rational and it prices in all available information, but if you watch the prices of stocks jump around, it is tough to picture that this is enough. There are analysts who rate stocks very well, but only a few are good enough in gauging the risk. In any single stock, there’ll be dozens of opinions, thus it is really complicated to figure out what the risk really is. There are risks that are very hard to avoid. Systemic (market risk) is one example. This consists of events, like financial meltdown, which tend to hit all markets. This can be managed by holding on during a downturn as the stock market has always rebounded. You can even take that moment to buy more while stock prices are down. Although picking at the bottom is tremendously difficult, for long-term investors, this is the best technique.
To handle risk, you need to do numerous things. The very first is doing your own research. Know what you are buying and when you will sell it. Study the bread and butter of investing and get enough experience amid gains and losses. Further, you need to know how much risk you can take. Know how much percentage is allocated to which investments. Since stocks are riskier than bonds, the rule of thumb is that the younger and less experienced you are, you should allocate a greater proportion of investments in stocks. Should stocks slump, you’ll have the time and experience to fix it.
Regrettably, there are risks that will arise and you’ll hardly avoid it. Risk can be either your friend or enemy in investing. Without taking risks it impossible to obtain good returns. The concern now is realizing the risk you can take and manage them appropriately. Risk per se is not awful. An educated risk is what you need, and that will remunerate you in the long sprint.
Don-Don Adolfo Crisostomo is a Registered Financial Planner of RFP Philippines. To learn more about investment analysis, attend the 10th Accredited Financial Analyst (AFA) program from November 12 to December 10. To inquire, e-mail firstname.lastname@example.org or text <name><e-mail> <AFA> at 0917-9689774.)
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