Market Risk
Risk is a concept which relates to the human expectations. It denotes a potential negative impact to an asset or some characteristic of value that may arise from some present process or from some future event. In everyday usage, "risk" is often used synonymously with "probability" of a loss or threat. In professional risk assessments, risk combines the probability of an event occurring with the impact that event would be and with its different circumstances.
Market Risk which is common to an entire class of assets or liabilities where the value may decline over a given period of time simply because of economic changes or other events has impact major portions of the market. It is estimated that over seven trillion dollars was lost in North America alone in the markets between 2000 and 2003.
In general risk is the chance that an investment’s actual return will be different than expected. This includes the possibility of losing some or all of the original investment.
Learn to manage risk. People who take risks, make mistakes and recover, often do better than people who learned not to make mistakes because they were afraid to risk. The reason teachers are not rich is because they operate in a “punish people who make mistakes environment” and they themselves are often people who are emotionally afraid of making mistakes. Instead, to be financially free, we need to learn how to make mistakes and manage risk.
Ways to manage risk fall into four categories:
- Transfer
- Avoid
- Reduce
- Accept
As an example let’s say you want to get a package across town, you could:.
- Avoid risk. The package does not get to its destination.
- Accept risk. Driving a vehicle is dangerous, but you accept the risk in order to deliver the package.
- Reduce risk. You drive carefully and take a slower route.
- Transfer risk. You send the package by a courier company
“There are risks and costs to action but they are less than the costs of inaction.” John F. Kennedy |
