Finance: Risk Management
In this day and age, millennials are taking financial risks that will come to haunt them in the future. According to a recent article published by the website Due, millennials are investing in ways that are against the given interest and inflation rates. In turn, this can lead to an increase risk for financial damage which is not limited to extreme monetary loss. When doing anything in finance, risk management is key. Whether it be investing in a mutual fund, applying for a bond, or even starting your own business, risk minimization should always play an essential aspect.
The first step that should be taken when doing anything, is to acknowledge the types of risks . Most risks are either systematic or non systematic. Systematic risks are not going to affect single party investors, unless they do enough financial damage to bring down a whole economy which is highly unlikely. So, the main type of risk that single party investors have to face is non systematic risks. These usually also involve certain companies and can even extend as far as certain industries.
Non systematic risks are risks that occur because of something that occurs in an industry. For example, take a random millennial. This millennial has extra cash he/she wants to invest in a company called Lights R Us. Lights R Us is a publicly traded company He then, without consulting any possible risks, invests seven thousand dollars into the company. It is then discovered that Lights R Us actually had a recall on one of their products, for it was discovered that they are prone to causing fires. This seven thousand dollars now have the potential to go down the drain. Activities that happen within a company that can affect an investor’s risk are an example of non systematic risks. Whenever investing in a company, these risks should always be taken into account.
A mostly effective method to reduce risk is something called diversification. Diversification is basically when an investor buys stocks from different companies in different fields. For example, a millennial can invest six thousand dollars into three different companies. For example, he/she can invest two thousand in Apple, another two thousand in Hollister, and finally the last two thousand in American Airlines. That way if one company or industry is not doing good, the other companies’ success will be sure to compensate it.
All in all, if millennials acknowledge the types of risks, and then use risk minimization techniques such as diversification, they can decrease their chances of suffering from monetary problems, and even secure their future.
By Arjun Sheth