Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
You can access both of our platforms from a single Saxo account.
What Is Risk
Education
Saxo Group
What does risk mean to you?
If you’re like us, you think of risk as the likelihood of something going wrong. If we stay home, not much can or will happen. But, if we go on vacation, we could get in a car accident, we could get lost or the vacation could cost more than planned, eating into our rent budget. On the other hand, there’s a definite upside to going on vacation. We’ll escape the routine and boredom of homelife and have a fun and memorable experience.
What about investment risk?
You’re probably most worried about the price of an investment you buy going down. You’re thinking, “Look, I just don’t want to lose money.” You might even be worried about an investment you didn’t buy going up by more than the investment you did buy. These are both good ways to think about risk, but there’s more to it.
Investment risk is all about changes in prices
When we talk about investment risk, we are talking about the likelihood of the price of an asset changing and by how much it could change. Price declines and losing money are definitely more painful, but investment risk (just like vacation risk) is really about change in either direction. The riskier an asset, the more likely the price will change and the larger the price change is likely to be.
Assets that are the most likely to go up in price are also the assets that are most likely to go down in price. Cash and cash like investments are relatively risk free. Bonds have more risk. Stocks are even riskier.
Uncertainty also plays a role
We also talk about uncertainty when it comes to investment risk. Very few investments are truly risk free. Every investment has a number of possible outcomes. The larger the range of outcomes and the more uncertain the likelihood of an outcome, the larger the risk. As investors, we are basically trying to predict the future. The more likely our prediction has errors, the more uncertain it is and the higher the risk is.
At some point your investments will go down…by A LOT!
Make sure you are mentally prepared for this. Whether we are talking about individual assets or markets as a whole, there are times when price drops will be extreme. That’s just the way markets work. You are better off creating a plan for how to react to these markets drops now than you will be when it is actually happening.
If you’re like us, you think of risk as the likelihood of something going wrong. If we stay home, not much can or will happen. But, if we go on vacation, we could get in a car accident, we could get lost or the vacation could cost more than planned, eating into our rent budget. On the other hand, there’s a definite upside to going on vacation. We’ll escape the routine and boredom of homelife and have a fun and memorable experience.
What about investment risk?
You’re probably most worried about the price of an investment you buy going down. You’re thinking, “Look, I just don’t want to lose money.” You might even be worried about an investment you didn’t buy going up by more than the investment you did buy. These are both good ways to think about risk, but there’s more to it.
Investment risk is all about changes in prices
When we talk about investment risk, we are talking about the likelihood of the price of an asset changing and by how much it could change. Price declines and losing money are definitely more painful, but investment risk (just like vacation risk) is really about change in either direction. The riskier an asset, the more likely the price will change and the larger the price change is likely to be.
Assets that are the most likely to go up in price are also the assets that are most likely to go down in price. Cash and cash like investments are relatively risk free. Bonds have more risk. Stocks are even riskier.
Uncertainty also plays a role
We also talk about uncertainty when it comes to investment risk. Very few investments are truly risk free. Every investment has a number of possible outcomes. The larger the range of outcomes and the more uncertain the likelihood of an outcome, the larger the risk. As investors, we are basically trying to predict the future. The more likely our prediction has errors, the more uncertain it is and the higher the risk is.
At some point your investments will go down…by A LOT!
Make sure you are mentally prepared for this. Whether we are talking about individual assets or markets as a whole, there are times when price drops will be extreme. That’s just the way markets work. You are better off creating a plan for how to react to these markets drops now than you will be when it is actually happening.
Latest Market Insights
Quarterly Outlook 2024 Q3
Sandcastle economics
-
Bonds: What to do until inflation stabilises
Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.
-
Equities: Are we blowing bubbles again
Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.
-
FX: Risk-on currencies to surge against havens
Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.
-
Commodities: Energy and grains in focus as metals pause
Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.
Disclaimer