The idea of risk has caused many to shunt away from investing in the financial markets. This prudence is actually a positive thing because the way I see it is that the greed for wealth in people aren’t able to overcome the fear of losing capital! However, is this fear really founded based on logic? Are all investors doing things because they cannot feel fear? Is there a systematic way to bypass risk and thereby minimizing fear?
Lets look at the logic of why risk might have been exaggerated and how we can manage that fear using logical techniques.
1. Understanding the relationship of Risk and Time
- This is especially true for shares that have higher but reasonable dividend yields because with a high dividend payout, net price of shares will be reduced over time as the price paid for the shares will be “refunded” to you through dividend payouts.
- Dividends can be used to subsidize next purchase of the same or other share counters.
- Most share counters have expansion plans thus there is a likelihood for them to appreciate overtime.
2. What about actual figures over time? (Risk really decreases?)
This is without taking into account any share price appreciation or depreciation. Actual amount might differ from reality however, this table depicts the power of utilising compound interest plus discipline in investing.
In the event that there is a share price depreciation, do note that dividends are still acting as buffers to cut losses in the overall portfolio.
3. What about an actual loss scenario even after a long period of time?
There are several tactical methods to curb losses
- Minimise paper losses by incurring real losses by selling your shares (Beginner)
- Veteran investors also make losses, it is a part and parcel of life
- Owning our successes are easy, but owning our failures are more important
- Dollar cost averaging (Intermediate)
- Buying more shares to average out the net price of each share owned
- Might be a slippery slope and this method might be more suitable for shares which are defensive in nature (E.g. Dividend shares or growth shares)
- Leveraging on share price price fluctuations (Advanced)
- Buying and selling to earn back profits to refund loss capital in your initial share purchase.
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In conclusion
Risk is present in everything we participate in. Bottom line is to actually fight that uncertainty by investing yourself rather than relying on a company to do the same exact thing for you while charging you for it at a ridiculous rate and guaranteeing your losses.
Do check out on methods and techniques to minimise losses during entry, otherwise, do consider using the methods mentioned in these articles to help you react accordingly when there is a sudden downtown in the market or your shares.
