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Showing posts with label Investing Risks. Show all posts
Showing posts with label Investing Risks. Show all posts

Friday, November 30, 2012

Your Investment Profile & Risk Tolerance

To get an idea of your investment profile, start by calculating your investment horizon.

Investment Horizon:

Investment horizon is the period of time, in years, that you wish to remain invested. Investment horizon may be measured as the point in time when you begin taking distributions, or it may be measured as the point in time when you expect to complete taking distributions.

This is the number of years that you can invest. Your investment horizon depends on your financial goal.

Financial Goal:

A financial goal is a goal that involves saving and investing to reach a specific amount by a specific date.

For example, a financial goal may be to save 2,00,000 for a college education fund for a child in 14 years, or it may be to save 30,00,000 for a retirement fund in 20 years.

You can achieve your financial goals through a combination of saving more, saving longer or earning a higher rate of return. Your goal may be to save for college, retirement, or a down payment on a home. Each goal has its own investment horizon.

For example, saving for retirement at age 65 when you're 20 gives you an investment horizon of 45 years. The longer the investment horizon, the longer you can save and benefit from compounding.


Estimate your Risk Tolerance:

Your risk tolerance is your willingness to accept some volatility in the rate of return of your investments in exchange for a chance to earn a higher return.

If you expect a higher rate of return, you should be willing to accept a higher degree of risk. This is called the risk-return trade-off.

Risk-Return Trade-off:

A basic investing principle that says the higher the potential rate of return, the higher the investment risk. Academic and industry studies support this relationship.

For example, stocks historically offer a higher rate of return than bonds. They also have a higher degree of investment risk. Investment risk is measured by the volatility of investment returns.

To get an idea of your risk tolerance, take a few minutes to complete the below risk tolerance quiz:

To get your own profile add the number of points for all seven questions

Add one point if you choose the first answer, two if you choose the second answer, three for the third and four points for the fourth question.

If you score between 25 and 28 points, consider yourself an aggressive investor.

Aggressive Investor:

An aggressive investor is an investor who is willing to accept a higher degree of investment risk in exchange for a chance to earn a higher rate of return.

Investment risk is the volatility of investment returns. A basic investing principle states that a higher degree of investment risk is required to earn a potential higher rate of return.

If you score between 20 and 24 points, your risk tolerance is above average.

If you score between 15 and 19 points, consider yourself a moderate investor.

Moderate Investor:

An investor who is willing to accept some investment risk in exchange for a chance to earn a higher rate of return. Investment risk is the volatility of investment returns.

A basic investing principle states that a higher degree of investment risk is required to earn a potential higher rate of return. On the risk-tolerance scale, a moderate investor is in between an aggressive and conservative investor.

This means you are willing to accept some risk in exchange for a potential higher rate of return.

If you score fewer than 15 points, consider yourself a conservative investor.

Conservative Investor:

An investor who is unwilling to accept a higher degree of investment risk in exchange for a chance to earn a higher rate of return. Investment risk is the volatility of investment returns.

A basic investing principle states that a higher degree of investment risk is required to earn a potential higher rate of return.

If you have fewer than 10 points, you may consider yourself a very conservative investor.

This is only an example of a short quiz used by financial institutions to help you estimate your risk tolerance. For specific investment advice, you should always consult your financial adviser.

Tuesday, October 2, 2012

Managing Two Types of Risks in the Stock Market

One of the hardest challenges for investors in the stock market is managing risk.

There are at least two parts to managing risk.

1. The first part involves understanding what is a realistic potential reward for the amount of risk you are willing to take.

2. The second part is determining exactly how much risk you can tolerate and still be comfortable with investing.

Risk and reward go hand-in-hand, but they are not always balanced. For example, one stock may present a significant amount of risk, but given economic and market realities can only deliver a much smaller potential reward. In simple terms this means you will take way too much risk for far too little potential reward. Assessing potential reward involves understanding the company, its industry, the economy and market forces at play.

Even excellent companies face strong head winds when economic and market conditions are not in their favour. For example, a homebuilder, no matter how strong it might be in the market would've had a difficult time returning much of a reward to investors during the financial crisis that began in 2008.

It is not good enough to be a financially strong company if the economic and market cards are stacked against you. If you are a long-term investor and are very patient this kind of scenario may work to your benefit.

However, will only work if the price you pay for the stock is low enough so that any current reward is commensurate with the stock price and any future reward is predicated upon economic and market conditions changing to a more favourable position for the homebuilder.

Continuing our example, it would've been unrealistic to expect homebuilder to return 12 or 14% a year during the worst housing crisis in modern times.

If you are willing to wait for economic and market conditions to favor the real estate industry this company may have been made be a good long-term investment.

If the stock price was unrealistically high considering the conditions in the financial markets and the real estate industry, the stock may never achieve the kind of returns that most investors expect and need.

This is one of the prime reasons that when you evaluate a stock you examine not only the company but also its industry and how that industry fits into the economy and current business cycle.

One of the other ways long-term investors make money is by managing the level of risk so that they're comfortable with their investments.

Risk is a part of investing in stocks. You can't avoid the risk, but you can decide how much you are willing to take.

Not all stock investments are equal when it comes to risk. Smaller and newer companies are a greater risk than larger, more established companies are. Of course, in a severe down market, it may feel like every stock is in a free fall.

The question is how much risk are you willing to take?

In general, the higher the risk, the larger the potential reward should be. You should expect more conservative investments to produce lower returns.

The task for investors is to match their tolerance for risk with investments that will meet their financial goals.

But, how do you know how much risk you can tolerate?

A variety of "tests" on the Internet are available to measure risk tolerance.

We don't put much value in these tests. Here's why: When nothing is at stake, people tend to over-estimate their tolerance for risk.

A good analogy is playing poker for chips that you get for free contrasted with playing poker for real money. There is a significant difference in the way you play the game. When nothing is at risk, you may make wild bets and outrageous bluffs. However, when your actual money is on the table, most people will play much a much more conservative game.

Another way to think about risk is to consider this scenario:

If we offered you an investment and said, "there is an 80 percent chance this investment will be profitable," many people would say that's a reasonable expectation.

However, if we said, "there is a 20 percent chance this investment will lose money," many people would say that is too much risk.

Yet, it is exactly the same investment. The point is how you view your money and risk determines your risk tolerance. Most people know instinctively that some risks are too high, but not every investment presents an obvious risk you can gauge.

For most investors, finding their risk tolerance is a matter of experience. It is important that you avoid letting friends or your broker talk you into an investment that keeps you up at night.

You may need to adjust your financial goals to reflect a lower tolerance for risk, but keeping your risk at a comfortable will help keep you on track with an investment plan.

Sunday, July 29, 2012

Small & Mid Caps Collapse upto 40%. What went Wrong?

Well known mid cap companies collapsed by 40% in just 2 days, What went wrong?
There are several mid cap companies which touched their year’s new lows on stock exchanges on Friday. The benchmark indices, however, fared well during the day. Sensex was up by 200 points and Nifty climbed 57 points at Friday’s close. Despite a rise of over 1% in both indices, several mid-cap scrips crashed to their 52-week lows.

Whatever be the reason (or rumour), Adani Group shares have been digging the bottom of late. Friday was no exception with the stock price of Adani Enterprises touching a six-year low of 171 per share, while Adani Power hit a record low of 40.75 per share. The Adani Enterprises scrip crashed 77.47% from its 52-week high of 759 per share while the latter was down by 64% from its respective high of 113.25.

Similarly, stock prices of Torrent Power, which recently posted a 70% fall in net profit in its first quarter results, have been at a 52-week low for the past two days. On Friday, the power company touched a three-year low price of 152.50 per share.

With the share prices of these companies at the yearly bottom, are they a good buy? Our experts suggest they are not worth the risk. This is happening due to margin calls, only small and mid-cap companies are facing this problem.

All the Sensex and Nifty-listed companies are being traded much higher than their 52-week lows. As these companies were strong, they never pledged their shares for liquidity. On the other hand, small companies, for expansions or for liquidity, pledged shares (loan against shares) and just then, the share prices of the companies started falling. The financial institutions, that took the shares of these companies against liquidity, had to sell the shares off at short prices. Hence, selling pressure increased and the share prices continued to fall.

This free fall is likely to continue, and investors should wait and watch for next couple of week, we believe only new reforms or measures from the government can help these scrips rise. Else, there is still a 10% room for them to fall further.

Is this matter of worry? Not at all, only thing which you need to take care of is to invest in fundamentally strong small and mid cap stocks. Infact, such corrections due to bad sentiments in market gives good opportunity to smart investors to invest in good companies with strong fundamentals at discounted price.

You can invest in Saral Gyan Hidden Gems and Value Picks for long term. Our analysts will never suggest you to take exposure in any of the stock which is sitting in huge pile of debt or pledged its shares to institutions for working capital requirement.

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Monday, September 26, 2011

Understanding Different Type of Investing Risks

1. Market Risk:

Corrections and bear markets inflict harm on countless individuals. In a classic correction, the broad market averages lose 10% to 20% of their value, whereas they plunge 20% to 35%, or more, in a real bear market. Some equity funds get hit worse than others in a bear market condition.

In addition to short-term risk, there's always a small chance that stocks can do poorly for about a decade introducing a long-term danger.

2. Interest-Rate Risk:

This peril confronts investors directly, especially those in longer-term portfolios. Simply put prices fall when interest rates rise.

If interest rates rise significantly, fixed-income securities become relatively more attractive, so money is shuttled from the stock market into higher-yielding bond and money market funds. You can easily relate this with rise in interest rates in last four months and ongoing stock market correction.

3. Currency Risk:

If your country's currency grows stronger, you will experience a currency loss on your foreign securities. Conversely, if your currency weakens, you will enjoy a bonus.

Fluctuating exchange rates are of particular concern to single-country investors. It can be devastating for individuals who hold funds for short periods.

Some fund managers may try to hedge their portfolios against adverse currency moves with currency futures or forward contracts. However, hedgers are fallible and lose money when the currency goes opposite their predictions.

In addition, a hedge costs money. Currency risk is generally not too much of a problem for long-term investors in well-diversified international funds.

4. Asset-Class Risk:

Stocks, bonds, and cash are the three major asset classes. If you allocate a disproportionate amount to any of the three main categories, or totally ignore one or two of them, you are subject to asset-class risk.

It's prudent to diversify across all three major asset classes even though you want to give primary emphasis to, say, stocks.

5. Management Risk:

The majority of actively managed funds underperform the broad market benchmarks. Even though a fund has beaten the market in the past, there are no guarantees it will continue to do so.

Individuals who stick with poorly run funds risk substantial under performance, which can compound over time. Investors in index mutual funds avoid management risk.

6. Sector Risk:

Industry or sector risk faces those who invest in narrowly focused sector portfolios, such as those focusing on health care or even utility stocks.

It also affects individuals holding more diversified funds that make big sector bets.

7. Country Risk:

This danger, which includes economic and political instability, is associated with single-country investments, especially those targeting developing markets.

8. Credit Risk:

The risk of default can be a concern for high-yield bond fund investors. Junk bonds can experience staggering losses when setbacks occur in this sector.

9. Tax-Rate Risk:

Investors have to be cautious in changes in tax laws that could make their holdings less valuable.