A Lesson in Risk

Risk is a very difficult concept for most investors to appreciate. And it's near impossible for novice investors to even comprehend investment risk. As you can imagine, novice investors focus on profits, not because they are greedy. They focus on profits because they do not know much about the risks.  

No one in the world will ever develop a way to prevent losses. But the sooner you come to appreciate investment risk, the sooner you will begin to limit your investment losses. Otherwise, you will learn the importance of investment risk only after you have experienced a series of very large losses. 

Most investors fail to account adequately for investment risk because there really are no commonly accepted definitions of investment risk that are valid.  

The most commonly accepted measure of investment risk can be found in every college finance textbook. It's also been integrated into securities guidelines for suitability standards when licensed investment professionals are managing client funds. Of course I am referring to beta. 

If you don't know what a security's beta is this discussion is over your head so I suggest you get up to speed and then come back. 

Unfortunately, the type of risk measured by beta is not at all what the investment world claims it to be. Let me be clear here. Beta is...