The One Question You Must Answer Before Investing
If many of the large banks, brokerage and financial services firms seriously considered their risks beforehand, the 2008/2009 financial meltdown could have been avoided and many of them would still be in business or in better control of their companies.
You have to be able to assess your risk and not just weigh the benefits against the possible losses, but also consider the worst that could happen if what you do turns out wrong.
Losses are not fun, but some are natural when investing. The goal is not to suffer losses that can devastate you and prevent you from recovering. Manage your losses and the gains will take care of themselves.
Some factors that increase risk are
- Failure to properly diversify
- Too much leverage, i.e. debt
- Not understanding what has to occur to make money
- Investing after large run ups
- Not applying common sense to what you are doing
- Not ascertaining (and usually overestimating) the work, thought and effort done by the advisors recommending the action
- Not being thoroughly satisfied that the advisors recommending the investment are truly independent and are not being compensated separately for steering you to that product (unless fully disclosed to you beforehand)
A way to protect yourself is to ask (and really answer) this one question before making any investment: “Suppose what I do turns out wrong?”