From the early days of Pascal and Golton to the modern forerunners in academia, defining and measuring risk has been a relentless pursue. Until we properly define and measure risk, there seems no way to mathematically defeat risk, creating risk free financial markets and economies.
Mathematics opened up a new door for mankind with the invention of probability study. Mankind started using probability studies in real life statistical research in the 1660s, starting with a man called John Graunt. Gruant's methods evolved through many hands into what insurance companies of today still use to calculate insurance premiums. Even though probabilistic study is a useful mathematical tool for defining the probability of the occurrence of several outcomes, it has certain flaws. Flaws rendering it useless in helping the world prevent or predict the Great Depression and the subsequent World Wars and each market crash that followed. Probability has 2 major flaws; Firstly, probability is based on each outcomes being mutually independent and random, resulting in a normal distribution and secondly, probability cannot take into consideration more outcomes than what was taken into consideration! Yes, that's what we all mean by being ?taken by surprise? isn't it? Mankind has indeed been ?taken by surprise? more times than we are willing to admit.
Because new information and new outcomes cannot be predicted, no studies depending on past results and occurrences are valid in the face of new information. That is why investment reports always states ?past results do not guarantee future performance?. Uncertainty is the main component of risk. Treasury securities are so ?risk free? because it has a high certainty of performance.
However, risk is not only uncertainty of outcome but also the consequence of outcome.
Too long has mankind defined risk based on the probability of occurrence without taking consequences into consideration! Uncertainty is the engine of risk and consequence is the end result of risk. Consequence of risk truly defines what is risky and what isn't!
I define risk as the possibility of a catastrophic loss.
We live in a risky environment all the time, almost everything we do is risky but we do it because the possibility of a catastrophic loss is small or that the negative outcome cannot be regarded as catastrophic.
This brings us to the true nature of risk; Risk is different when regarded by different people. To some people, a 20% portfolio loss is acceptable while for some other people, that same 20% portfolio loss is catastrophic! When an investor is able to define what constitutes a catastrophic loss to that particular investor, the investor will be able to use modern risk prevention tools to create totally risk free investment portfolios!
If even a 1% portfolio loss is catastrophic to an investor, then that investor should not consider investing money. If one defines a particular level of catastrophic risk like say, 20%, then one can use methods like the Protective Put (http://www.optiontradingpedia.com/protective_put.htm) or the Married Put (http://www.optiontradingpedia.com/married_put.htm) option trading strategy to ensure that one's stocks will never drop below the level defined as catastrophic risk! In fact, a simple stop loss policy implemented portfolio wide can limit losses to the level defined as catastrophic loss. If you know you can never lose more than you want to, would you still regard your investment as ?Risky??
Taking steps to limit the potential downside of a portfolio is said to be adding ?convexity? to a portfolio. A convex portfolio has unlimited potential upside while having a limited downside potential. Building convexity is extremely important to modern risk management because there are no way to predict what would possibility happen. All we can do is to make sure that the worst that can happen falls outside of ones? definition of a catastrophic loss. Such a portfolio was hard to come by a long time ago but with the invention of great financial instruments like stock options recently, convexity and risk free investing is open to anyone and everyone who asks themselves, ?what does a catastrophic loss mean to me??.
If you look around, you will find there are many investors who have become a full time passive real estate entrepreneur. Let me share with you some the basics of making passive real estate investments. Stick to these basics and you can also add your name among the successful passive real estate investors.
Investing In Limited Partnership It is one of the best and safest ways to earn massive passive income. The biggest advantage of investing in limited partnership is that your liability will be limited up to the amount of your investment only. A limited partnership requires you to invest only a partial amount for the property, and you are liable for up to that amount only.
However, you can still enjoy the benefits from the appreciation and the tax deductions for the total value of the property. What is more, if you put in a little more effort you can easily make much larger passive income.
For example, if you have the time and ability, it is always prudent to do a project side by side. These projects may include buying, building or rehabilitating the rental houses. If your major concern is capital, you need not worry because limited partnership gives you an opportunity to use others people money.
This involves no risk at all because as I said you are liable to only that much amount that you have partially invested in the very beginning. But, in spite of the limited liability, you have unlimited scope to have a large share in the profits. What is more, such limited partnership has an edge over normal corporations because your profits are taxed just once.
Investing In Commercial Triple-Net Lease Property When it comes to making passive real estate investments, investing in commercial triple-net lease property can be an excellent ripe for profit for you. Investing in commercial triple-net lease property is quite different from owning duplexes, apartments, land, or an office building.
It does not involve any headache because the triple-net long-term lease agreement works in such a way that your tenants perform all the functions for you. Whether it is collecting the rents, refurbishing the premises, paying the property taxes, insurance premiums, maintenance, accounting, legal, and other operating expenses your tenants do everything on behalf of you. In fact, investing in commercial triple-net lease property carries tremendous profit potentiality, and at the same time, you can enjoy some great advantages.
Investing in commercial triple-net lease property does not involve any risk. If at all, there are any risks, they are very nominal. It does not require you to deal with the management hassles. The lease payments can earn you significant monthly income.
What is more, unlike other renters, your tenants do not abuse the property. Rather, they do everything to make the location well maintained and attractive to customers. What more can you hope for?
Thus, if you are not getting desired success in active real estate investments, it is worth giving the passive ways of earning massive income a try.
Both Jason Ng & James Klobasa are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Jason Ng has sinced written about articles on various topics from Finances, Investments and Trading Strategy. Jason Ng is the Founder of Masters 'O' Equity Asset Management. He is a fund manager specialising in options trading. Please visit &. Jason Ng's top article generates over 301000 views. to your Favourites.
James Klobasa has sinced written about articles on various topics from tax, Marketing Secrets and Arts. James Klobasa, once broke with no job and $20,000 in debt made a choice that changed his life forever. That choice was investing in Real Estate. With the founder of, The Little Building Co. you too, can learn at. James Klobasa's top article generates over 135000 views. to your Favourites.