Risk and Investing

Risk is an inherent part of investing. Every investment carries with it a certain percentage of risk. This must be acknowledged by every investor. However, while foolish and excessive risk-taking can lead to financial catastrophe, it is important to note that not all risk is bad. Investors should understandthat excessive risk can be dangerous, however, eliminating risk in any investing scenario,is neither possible,nor even beneficial.The bottom line is that fortunately or unfortunately, risk can never be truly eliminated, and an appropriate tolerance for risk is essential for meaningful economic growth. It must be accepted that risk will always be with us. This is because since many more things could happen,than will ever actually happen, some level of uncertainty will always exist. No matter how much care is taken in making any decision, a negative outcome is always a possibility.

Financial experts agree that risk plays an inherent part of the growth of the market. In a risk-intolerant environment, markets would require enormous returns on equity investments and significantly higher interest rates on debt. In this type of an environment, few new businesses would ever be started, funding of research and development would disappear,for all but a handful of projects, and business development would slow to a trickle. The reality would be that growth would simply be priced out of the market. The bottom line is that it is far more likely that risk will lead to economic growth than it will to danger.

Even though risk is the fuel that feeds growth, the acceptance of risk does not have to be synonymous with the acceptance of recklessness. So the question investors must ask is how do we avoid recklessness, without penalizing prudent risk-taking? Here are some factors to consider when looking at risk and investing-

• Rewards must be tied to the risks being taken. Reward without risk in the investing world is simply not rational. Investors must clearly be able to determine how much risk they can take, in relation to the possible reward. This level of risk-taking will vary dramatically, from person to person. Each investor's level of acceptable risk will be based on the personal needs, financial goals, and overall psychological makeup of the investor. Investors who have investigated the market, done their research and understand the time value of investing will be able to find an acceptable level of risk.


• Risk takers should be expected to act with discretion and intelligence, taking into account all the known facts and the relevant circumstances. When acting on behalf of others, a risk taker (whether it be the investor or a professional acting on behalf of an investor),should be expected to act in the same manner as that person would with his or her own business or personal finances. It must be acknowledged that entrepreneurs, and inventors (mostly risk-takers),all create enormous wealth for the broader economy; their risk-taking should not be punished so long as they are being prudent. When investors and lenders finance these visionaries, (particularly with other people's money), they must be expected to exercise discretion and due diligence. They should also work to dampen any unrealistic expectations that such entrepreneurs and inventors may have.


• Risk is a vital ingredient of growth-If we seek to eliminate risk, we may be eliminating the next big advancement, for our society.If we punish risk takers, no one may fund or invest in the next great step forward. The market flourishes and grows on the risk that it is able to constructively bear. Avoidance of excessive risk may well be necessary, but any attempt to eliminate risk may just be the greatest risk of all.