There are a number of key traits that any good investor must have, but nothing is more important than learning to identify risk.  Without this crucial skill, a dream of riches can turn into a nightmare of regret overnight. Though this article does not relate specifically to one market (private placement, managed forex, managed futures, etc.), its importance can NOT be understated.

Before we get to the good stuff, let’s identify the 3 critical steps that must be followed when considering any alternative investment.  Generally, these processes should be used by all investors, and MUST be completed correctly to succeed in the alternative investment world.

Steps to Evaluate Alternative Investments

1. You must define the risks associated with the investment you are pursuing, and make your choice based upon your tolerance of it.
2. You must properly estimate the reward, focusing on realism rather than hopeful expectations.
3. You must weigh the risk of the investment and against the reward, choosing the decision that is best for your investment goals.

Though this may seem simple, it is really not that easy in most cases. Without proper analysis of both risk and reward, deviation from expectations can develop, and problems can start to follow shortly thereafter.  Despite the fact that weighing risk vs. reward is the key to success, to complete this process correctly, you must first understand how to evaluate each separate from one another.  In the section below, we will teach you how to do just that, while providing tips for private placement, forex, and futures investments to ensure we address all of our reader’s interests.

In the alternative investment world, RISK is thought of differently than it is in other facets of life.   In all actuality, by definition, RISK should be thought of as the CAPITAL INVESTED + OPPORTUNITY COSTS.   To help you understand a few typical risks of the alternative investment markets, and give you a better idea of what we are talking about, we listed a few tips below.

Managed Futures:   Risk is typically assessed by looking at the audited history of the managed futures trader, and focusing on the maximum “draw down” months.  Though this usually worst case scenario you will encounter, it is quite possible the losses could be higher in future months. Once you view the history of the managed futures trader, have a discussion with them about the “stop loss” strategy and procedure to prevent losses for their investors. Usually, good traders will “flag” the accounts, and trade conservatively until the balance is built back up.  Generally, risk is usually limited to 15-20% of the account value.

Managed Forex:   Risk in managed forex investments is usually defined by the leverage and “stop loss” procedure of the trader.   Though it is always good to look at the history of a forex trader, in many cases, we have found that investors are choosing private fx investments over licensed ones.  Since private traders are not audited by a governmental agency, their returns should be ALWAYS considered hypothetical.  In licensed forex investments, you may have lower returns, but you usually will have lower losses as well. In private managed forex investments, you must be prepared to risk your entire account value, no matter what the promises of the trader are.

Private Placement:  Defining risk when pursuing private placement programs is critical to ensure you make an educated decision.  Despite what many uneducated brokers may claim, your assets must be collateralized (i.e. put at risk) to stimulate a line of credit for the trader.  If you choose to work with programs that “ping” your account, or let your funds remain in your account unencumbered, you are usually setting yourself up for disappointment. In this area, more than any other alternative investment, you are prone to lose a huge amount of money in OPPORTUNITY COSTS. In many cases, people spend years looking for a program, when they could have doubled their money several times over the course of that search.

As we have said before, identifying risk properly is the key to protecting yourself.  Even if you don’t have the guts to pull the trigger, it is crucial to learn and understand your risks at all times.  Once you properly determine your risk, you have accomplished the hard part and are on to the next important step, projecting your reward.

In the alternative investment world, REWARD should be thought of as the profit that you earn and withdraw over the course of your investment.   Until you have the money in your hand, any talk of “rewards” should be considered premature. Unfortunately, many people focus on future hypothetical earnings, losing touch of reality and risk in the process. Once an investor drifts away from acknowledging the risk associated with an investment, all hell can break loose.  As we have stated prior, prospective “rewards” should NEVER be the sole reason for making a decision to pursue an alternative investment.  If you are smart, you will address every other aspect of the transaction, and then view the yields before making your reward projection, and final decision.

Now that you know how to evaluate risk and reward separately, you have arrived at the final step, weighing the two against each other.  The good thing is, this is really the easy part! If you have already defined your risk and reward properly, it should be as simple as comparing the pros and cons of your: (A) decision to move forward, or (B) choice to pass on the opportunity. Once you complete this final stage of the 3 step process, it will become increasingly easier to substantiate future alternative investment opportunities. Eventually, by adhering to the process we have discussed, your experience and diligence may just carry you to a life of success, and wealth.

To summarize, whether you choose to list “pros and cons”, ponder the risks and rewards in your mind, or ask someone with relevant experience, risk assessment techniques are fundamental to promoting success. Once you identify the specifics of the transaction you are evaluating, it is always good to go through the process and key points we have listed above. By nature, due to the cutthroat world we live in, it is best to evaluate your risk before your reward, and weigh them based upon your risk tolerance. This will keep your eyes open, facing the facts of the transaction, rather than daydreaming into your fantasy of riches…

InsideTrade LLC Staff
(412) 235-2855