Depending on the performance of an individual stock your potential return could double or could quickly become worthless. Volatility then defines the degree to which a value of an investment tends to fluctuate over time.

One basic principle of investing for the beginner or the veteran stock picker, risk and volatility go hand in hand with investment returns, the higher the risk, the higher its volatility and potential returns. Investments with high risk and volatility have a greater chance of losing value is held over shorter periods of time, say less than five years. The effect or chance of a stock increasing in value over longer periods of time worked the same way.

Risk tolerance is defined by the amount of risk that you, the individual investor, are willing to withstand and be comfortable with in your investments. Not identifying what kind of risk tolerance you possess can surely lead to investing disaster.

Determining your risk tolerance is easy once you identify two very important factors. They are your time horizon for your investments, essentially how long you plan to hold your investments, and your personal response to risk. That means, what decision are you likely to make when you’re investment loses 15% in a day.

Obviously the longer you can hold your investment the more risk tolerance you are able to withstand. The longer period of time keep you from making hasty decisions over short-term ups and downs in the price of your stock. Longer-term can be defined as 10 years or more. Investors with moderate time horizons, say 5 to 10 years generally have moderate risk tolerance and should invest in growth and income by investing in stocks, bonds and cash equivalents.

Investors were shorter time horizons one to five years generally have low risk tolerance should invest almost entirely for income by buying bonds and cash equivalents. There is some correlation between risk tolerance and age however, that doesn’t apply across the board to everyone. Identifying your personal response to risk should include an examination about how you feel personally about taking risk in losing money. If you avoid risk in everyday life chances are you should avoid it in your investment strategy.

For example if you worry on a daily basis, that will easily trans-late into worrying about your stock investments. If you enjoy risk and don’t worry easily you should feel comfortable investing for growth or trading options online assuming you have a longer time horizon.

One of the best ways to identify how you will respond to market fluctuations and risk is to own a stock. Let’s say an issue at $20 per share. Over three months the stock appreciates and gains four dollars a share to $24. You begin by feeling pretty good about yourself having picked the winner and you are enjoying a nice gain. Now, through no fault of your own, earnings start to come out by companies related to the industry of your stock. Since they are not good your stock loses eight dollars per share over four days. Ask yourself this question, how would you react in that situation? If you can answer this question and answer this question truthfully you are on your way to identifying your investing risk and risk tolerance factors. Not everyone is comfortable trading in Forex Mini Accounts, and not everyone wants to trade in bonds. Everyone fits in somewhere, find your place and you will be a much happier investor

The markets just keep getting disappointing news.

This past week a bunch of banks reported worse than expected earnings and loan losses that are still growing. Bank of America saying they will possibly need billions more in aid from the Federal Government. Then besides all of Thain’s earlier missteps, came the revelation this past week that he spent 1.2 million redecorating his office!! All I could do was shake my head in utter disbelief. What’s 1.2 million when the company (Bank of America) that your are second in command of is getting Billions of dollars of taxpayer money from the Federal Government.

Microsoft released a disappointing earnings report and because of the market volatility they are unable to provide guidance for revenue or EPS (earnings per share) for the rest of the year.

Then there was a decline GDP(Gross Domestic Product) in Q4 for both China and the UK. This means that growth is slowing which is a bad thing.

To top it off housing starts fell to an annualized rate of 550 thousand units, the lowest on record going back to 1959. Initial jobless claims jumped back up to 589 thousand, which is a 26 year high.

Another ponzie scheme was discovered in California. Approximately 1000 people lost 52 million dollars.

Should I keep going on or just quit now? There is just no good news out there.

If the government announces plans to create a bad bank, that’s a bank that buys all the toxic loans from the troubled banks to get the loans off their books, that might put a floor in the financial markets and turn things around. It’s an idea that has been kicked around. We’ll have to wait and see.

Back on November 7th I wrote in my Stock Market Updates “Obama plans to raise the amount of federal money spent on science and technology research, to spur innovation and job creation. He will be seeking approval to spend 150 billion dollars over the next 10 years on clean energy technologies, and 10 billion a year over the next five years on healthcare information systems. He has pledged to double federal funding for basic research in science and technology, this includes embryonic stem cell research.”  As bad as the market has been the last few weeks, stem cell biotechs and healthcare stocks have been moving up. Geron’s announcement this past week about starting stem cell trials in humans for spinal cord injuries really caused a move. Keep in mind it is only a 10 person trial and it’s many years from being marketed. I am not recommending that you go and invest in these stocks, do you own research and investigation. These are sectors to keep your eyes on.

Some economic events this week are:
Existing home sales Jan 26th
Consumer confidence Jan. 27th
Durable goods orders Jan. 29th
Jobless claims Jan. 29th
None of which I expect to be good or surprise us with better than expected numbers.

As always whether you are long or short may all of your trades be profitable!!

Becky