Although it would be nice, there’s no one definition of “risk.” it depends on your perception and how you see it. Sometimes an obvious risk to one person may be completely missed by the next person. As an exchange traded fund (ETF) investor, how do you cope with this aspect of investing?
Neal at Wealth Pilgrim says that there ways to make smart decisions about risk, which is an inherent aspect of investing in anything, whether it’s stocks or ETFs. Risk can be broken down into four categories:
- Required: Risk that you simply need to take to reach a goal.
- Perceived: What’s risky to you personally.
- Risk tolerance: The maximum risk you’re willing to accept.
- Risk capacity: How much risk you can afford to take on.
Risk can mean very different things to every investor, at different times. For example, you might have started off risk-tolerant before suffering a big loss, which has in turn made you more risk-averse. The trick is to apply the right definition at the right time. [How to Deal with Undefinable Risk.]
First step is to identify the risk: Is it real or imaginary? At the very least, whether you have assets in the markets or not, you are reflecting on how risky your assets are, how risky you need them to be, and what the goals are for them. [Ways to Make Sense of Irrational Markets.]
Most important is to not fall prey to the thinking that just because you’re comfortable, there is no risk. Every decision comes with a bit of risk.
Use a strategy to help mitigate your risk when you are in the markets. We use the 200-day moving average to determine when we’re in and when we’re out. When a position is above its 200-day, it’s a buy signal. When it drops below or 8% off the recent high, it’s a sell signal. Having such a strategy has you in a position in time for any potential long-term uptrend, while having a point at which you sell puts a cap on your losses. [10 Tips to Manage Risk.]
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.