How to manage risk in finance

Published in Rescu, September 2014 by Janine Cox

There are times when we need to give more thought to risk than other times, however, most investors get this completely wrong in that when risk in finance is high most don’t see it and when risk is low most still see high risk.

I pondered the question of risk while preparing to be lowered into a crocodile enclosure in Darwin recently, and I’d like to share with you what happened.

You may say that once in the crocodile enclosure it is probably a bit late to be thinking about risk, but quite to the contrary.

I did consider the risks before buying my ticket. However, when being lowered into the enclosure there is real and present danger that you can physically see, and it was at that moment that I truly understood the risk.

What made a huge difference to my perception of the risk were the people working with the crocodiles who understood the risks and explained how their equipment was there to significantly reduce risk.

In coming face to face with Mr Croc, and I got up close and personal with this guy, I was in awe as to how big he was – around the length of three men.

There was only 1 inch of plastic between us and we were so close at times that I could see in his mouth, in detail. 

His tongue was pink and looked very soft and he had the biggest teeth I had seen on something still living.

I admit that I did experience fear, before I signed the disclaimer, which is there to protect the crocodile park in the unlikely event that something went wrong, and I lost a limb or worse.

After being inside the enclosure for a short time it wasn’t the croc that was the concern, it was the stink from the water. 

I had not given thought to Mr Croc marking his territory the whole time I was in there. 

It was his home and I was an intruder, and a potential meal.

When you understand the protections that are in place to ensure your safety, being in the crocodile enclosure is not scary and I found watching the croc make eyes at me through the protective enclosure an amazing experience.

Had I allowed fear to control my actions I would have missed out on experiencing nature in this way.

In relating this back to investing in the share market, most don’t understand the risks and how they can be managed, and therefore this is where fear comes in.

If you were able to compare the fear of a real life experience like meeting a croc face to face with investing in the share market, you would wonder why you haven’t been more actively investing.

It is fear of the unknown, or fear of loss that stops us. 

But let me tell you that share markets have been around for a very long time and the same principles that applied one hundred years ago still apply today.

Once you understand how the market works and how to manage the risk you can get in and out safely, without fear.

One final point about fear.

A study was conducted a few years ago, and the findings showed that what people fear the most has less than 1.0 per cent chance of occurring, and yet human beings focus on the worst case, and unfortunately this stops them from great experiences in life.

To learn how you can gain the required knowledge and skill to ensure your success in the share market click here.

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