I want to talk today about risk. This is a topic on which there are many varying opinions. Makes sense since we all have different risk tolerances. But this isn’t the only issue. There are also different views about what’s risky and what isn’t. I’m going to give you my view, but feel free to also be heard.

For starters, I like to have as much control over my investments as possible. I’ve mentioned before that I’m not a fan of having a fund manager decide what my money is being invested in. People also want to take a long term approach in mutual funds, even though mutual fund managers are constantly under pressure to perform consistently every quarter. That means a lot of buying and selling that wouldn’t go on if they truly had their customers’ best interests in mind. Warren Buffet owns companies from quarter to quarter and year to year that may not have gone up a lot, but because they are sound companies. I happen to think he’s doing quite well for himself.

Let me also say that I’m not a day trader. I’m not trying to time the market and get in and out really quick. I do, however, look over a companies financials and try to understand the business that they’re in. I look at McDonald’s for example. They own some of the most valuable real estate in the world and sell hamburgers. This is a simple business that I can understand and they execute their systems very well. I would consider this a well considered risk. (I don’t own McDonald’s by the way. At least not yet)

I’m also not just talking about mutual funds and stocks here. There’s also a prevailing attitude when it comes to risk and investing. It seems that everyone is more concerned about losing their money than they are about increasing it. This is evident when all the talk is about diversification, stop limits, and the like. I don’t think we should ignore this, but I think we could shift a little more emphasis to picking better investments. Diversification counteracts the volatility that is usually associated in a single investment. It is inherent though, that by limiting the downside, you’re also limiting the upside.

No matter what you view as risky, there are ways to mitigate it. I am not a proponent of just going out blindly and investing. You should seek as much information as you can. You’re obviously doing that by reading this and other sites about finances. You can learn a lot from the differing information.

Also, don’t ever use money that if lost would financially devastate you. Along with contributing to your investments, contribute to an emergency fund. If you’re relying on your investments to be your emergency fund, you’ll make different decisions than if it were separate. You don’t want to have to sell an investment (especially one that’s down at the time) because something unforeseen happens and you need to liquidate. This is a huge mitigating factor.

So, let me hear what your thoughts are on risk and investing.

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