Don Steinmann's Investment Tip of the Week

Don Steinmann's
Investment Tip of the Week

Defining Risk

The English language has by far more words than any other. But still definitions can be vague. Take the word scooter. You can buy a scooter (essentially skateboard with a steering handle) for $16 at WalMart. Or you can buy a scooter (essentially a large motorcycle capable of carrying 2 people at 85 mph all day long) at your local Suzuki dealer for $11,000. Same word, two very different things.

Another really good word is risk. We speak about having risk in investments. But what do we mean by that? I like to put it this way. There is risk jumping out of an airplane with a parachute. There is also risk jumping out of an airplane without a parachute. The risk is not the same.

As investors we have to look at what risk we are willing to take, and then we must carefully define that risk. Telling an investment advisor or broker you don’t want to take too much risk is meaningless by itself. The word is too imprecise. So sit down, think about it and think about what level of risk you are comfortable with. I like to use a 1 to 10 scale, where a savings account is a 1 and commodities futures are a 10. Then look at your investments and see if they match up. If they don’t, then make appropriate changes.

Be clear about what you mean when you talk about risk when it comes to your investments, so you’re not disappointed because of too much, or too little risk in your portfolio.

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