DIF Education CROSSING THE STREET ON THE RED OR GREEN LIGHT
DIF BROKER | LISBON PORTUGAL / WWW.DIFBROKER.COM
Crossing the Street on the Red or Green Light? Risk Management With the second post we will be speaking about the risk as a common sense risk which is presented everywhere in our daily life. Speaking about risk in a common sense, how do we define risk? Risk is the possibility of something bad, uncomfortable or dangerous happening. In our daily life we are permanently facing risks, the risk of crossing the street and being hit by a car, the risk of being robbed in a busy day at the Metro by a pickpocket, the risk of not providing a good solution to an existing problem or a proper answer to a question. We are living in a world where risk is an integral part of it and we have to be conscious about it to be able to manage that risk. Risk can be managed and lowered based on each individual perception, for example, you can cross the street on the pedestrian green light, being the most logical moment to cross the street, but you can’t be guaranteed that it will be the safest one, because anytime a driver in a hurry passes the red light, you can be harmed, and that situation can be named as an unexpected risk. On the other hand, you can cross the street on the pedestrian red light, looking to your left and right side assuring that no car is coming, but immediately and intentionally you are assuming higher risks of being hit by a car than in the previous scenario, however, that higher risk can make you reach your destination faster. Now, you need to be conscious about the type of risk you can assume based on your personality, are you the one who is following the rules in a rational way with smaller risks or the one who is assuming higher risks for a higher level of achievements? We would say that the same scenario applies to the financial markets, where managing risks is the most important key to achieve good results. I will say that there are 2 type of investors investing in financial products, those using a strategy based on knowledge and a rules, making an investment with a smaller risk (as in the case of crossing the street on the green light) and those investors who are investing in the financial products assuming a higher risk to try and achieve better results based on personal emotions and personal knowledge (as in the second example of crossing on the red light). At the end you have 2 different results, following the first rule you might go for a long term investment following a rational based investment with a smaller risk where the results can be smaller gains but regular or a small loss. The other scenario can be either you losing a bigger amount of money or making a bigger amount of money, but definitely shouldn’t be considered as a long term investment. Now depending on how much risk you can tolerate and how much risk you can assume and accept, there are several different suitable strategies to your risk profile. DIF Broker is offering the possibility of each investor to pick up a strategy which suits to each individual risk profile.