Risk comes hand-in-hand with investing and should not be thought of as a bad thing unless we don't understand what it is and how it affects us. We all experience it in our lives and depending on who we are, rollercoasters can be exciting with our hands in the air or nerve-wracking as we clutch onto the safety straps.
The first step is to take our life goals and treat them as a series of different rides instead of just one big one. For each ride or goal, we need to chart our risk tolerance so we can implement effective strategies.
Market capitalization is the value of the company if every single share of the company is sold at the current market price that the shares are trading for today. While this value is easily calculated by taking the total number of shares multiplied by the per-share price, it is not a realistic value for the company since it assumes there is endless demand to buy each share at the same price. Instead, market capitalization is used as a back-of-the-envelope measurement of the potential value of the company in the current market.
The growth potential or trajectory of a company is also another way investors can distinguish investable companies. Stocks can be divided into growth stocks or value stocks.
If we prefer to avoid target-date funds or don't have access to them, we can implement our own strategy that attempts to reproduce the same outcomes. A simple strategy can be broken into 3 steps.
- Start with a portfolio
- Increase contributions over time
- Decrease risk over time