|
|
The only way to completely avoid risk is to be poor. Aggressive investments risk substantial losses of equity while conservative investments frequently earn less money than inflation Risk is present in every type of investment from real estate to stocks to futures to mutual funds to bonds: Mutual Funds Eighty percent of mutual funds underperform the S&P 500! Is it any wonder that mutual funds are compared to the "Lipper Average" instead of the S&P 500? When the stock market is losing money, the average mutual fund will lose more. In good times, when stocks rise, mutual fund share holders will get lower gains than merely holding on to the stock market indexes. The reason for this is mainly due to mutual funds' management expenses. All mutual funds have management expenses regardless whether they charge commissions or not. Bonds Bonds carry equity risk when bond holders are forced to sell before term expiration or when issuers go out of business (not likeley for big companies or the U.S. government). Bonds also endure "opportunity" risk because more money can usually be made in other relatively conservative financial intruments. Real Estate Real estate's main risk is due to very low liquidity. Of course there is also equity risk just as with all other financial assets. But if real estate is purchased at an inopportune time it can be very difficult to extricate because sellers set the price. If set too high, potential buyers will be scared off from even taking a look at the property. Stocks When a stock is bought, the most that can be lost is the amount of money paid. There are unlimited losses possible, however, for shorting a stock. All of this equity risk can be limited through protective stops wherein orders are placed to exit trades if the price goes down or up past a specified price limit. Stocks also suffer from liquidity risk for those issues that have very small daily volume such as with some penny stocks. Futures Futures have similar risks to stocks - equity and liquidity when there is small daily volume. But futures are highly leveraged (e.g., the 30-year Bond Futures are worth $1,008 per point) so the possible gains and losses are much bigger than for stocks. That makes it imperitive to protect futures positions with protective stops so as to define and limit risk. Given limited risk, futures have no more risk than stocks but still have the advantage of leveraged gains. |