| Wealth is an abstract. It is sometimes defined as | | | | number of years before retirement. |
| fecundity or sustainable spending. It is defined as the | | | | If the money is not needed, and its loss will not have |
| primary goal for investors and is measured by the | | | | a major impact on the investor's wealth, then the |
| level of 'expendable income' or 'capital' in their | | | | investor can look at biotech stocks that may |
| portfolio. | | | | skyrocket if the lab discovers a new drug, or a cure |
| Many people define wealth by the total of their | | | | for a disease, or will bottom out if the lab loses their |
| assets including real estate, funds, and investments. | | | | funding. |
| Others measure it by calculating the amount of | | | | Market Risk |
| money they can afford to spend. Either way, it is | | | | This is the risk associated with the different markets. |
| important to pick one method of calculating wealth, | | | | Can an investor survive a stock dive, or if the real |
| and stick to it. | | | | estate bubble bursts. This will determine whether the |
| How wealth is defined dictates how a person | | | | investor can manage mutual stocks, or should stick |
| approaches investing. Benjamin Graham states that | | | | with blue chip stocks. It will also determine whether |
| the investment management is the management of | | | | the investor purchases a good home in a good |
| risks, not of returns. This is the foundation of a | | | | neighborhood, expected to appreciate 10% in ten |
| well-managed precept. | | | | years, or penny stocks that might double in eighteen |
| There are several methods of managing risks. Each | | | | months. |
| one provides several benefits, depending on the | | | | Managing Market Risk |
| investor's aggressive behaviors or willingness to | | | | This risk is associated with the area in which the |
| accept high-risk ventures. However, understanding | | | | money is invested. One way to manage this risk is to |
| risk can be tricky. One person, such as a broker, may | | | | stay within markets the investor understands. |
| consider a stock that does not perform well as a | | | | Another way is to avoid buying into both fields. Gold |
| high-risk stock. A private investor may consider a | | | | and Real estate are solid, but when they are |
| low-risk stock anything that does not drop below the | | | | increasing, stocks decrease, and vice verse. By |
| 10% level. | | | | understanding the risk and expectations in one, two, |
| Individual Risk | | | | and five decades, the investor can create a good |
| This is the risk associated with the investor's personal | | | | diversification package. |
| wealth. What can the investor afford to lose? And, | | | | The first two have statistically based solutions; |
| how long can that investor leave their funds | | | | increasing risk tolerance addresses an emotional |
| untouched. It is also important to calculate how much | | | | challenge. One way to manage risk tolerance is to |
| that investor needs to gain, and in what time span. | | | | minimize the negative impact of the negative risk. |
| Managing Individual Risk | | | | There are two ways to manage risk. First, by building |
| This is easy to calculate in the short term. Just | | | | a cushion against risk. Second, by ignoring it. |
| estimate how much money can be comfortably | | | | Education |
| invested. In the long run, it involves a few in-depth | | | | Education is a wonderful buffer against risk. It is not |
| calculations. The amount of gains expected, and the | | | | a magic spell to protect investors from every facing |
| impact of failing to meet expectations is a risk that | | | | risk and losing money, but the more knowledge an |
| must be written in black and white. When an investor | | | | investor has, the less often they will make a poor |
| is planning for their retirement, the funds must grow. | | | | investment choice. |
| The rate at which they grow depends on the | | | | |