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How to Manage Promissory Note Risk

July 10, 2012 | Comments: 0 | Views: 239

Learn How to Take Calculated Investing Risks

The first step in the risk management process is to acknowledge the reality of risk. Denial is a common tactic that substitutes deliberate ignorance for thoughtful planning.

Definition of Risk: The degree of uncertainty of repayment of principal and interest; it is the uncertainty (risk) that the investment will actually repay its principal and promised interest at the promised future date.

Definition of Risk Management: Promissory note risk management is a process for identifying, assessing, and prioritizing risks of different kinds that might impact your investment. Once the risks are identified, you should create a plan to minimize or eliminate the impact of these negative events.

Definition of Promissory Note: Promissory notes are financial instruments; along with cash, stocks, and bonds, promissory notes are basic types of financial instruments; they are debt instrument. When an investor invests in a note, he or she is lending money. The signor of the note is a borrower who agrees to repay the principal amount of the loan at a specified time; promissory notes pay interest periodically. Because most promissory notes pay interest on a regular basis, they are also described as "fixed-income investments".

Risk-Return Trade-Off: Because most investors are generally averse to risk, investments with greater inherent risk must promise higher expected yields. All investments carry a certain level of risk, since investment return is not guaranteed. According to modern investment theory, the greater the risk you take in making an investment, the greater your return has the potential to be if the investment succeeds. The reason for this is that investors need to be compensated for taking on additional risk. The risk-return tradeoff is pervasive throughout economics and finance. It is the reason that riskier promissory note pay higher interest rates than safer notes.

Here's How to Manage Promissory Note Investing Risk:

• Determine your risk preference • Determine your risk tolerance • Determine your knowledge and skill level • Determine your time horizon • Allocate your investing capital • Identify the specific risks in the note before investing • Select the risks that you take• Control the risks that you take • Understand that prediction the future is very inexact • Always have a margin of safety for protection• Pre-determine and pre-plan your exit strategies

Conclusions We have listed several principles and guidelines to deal with the risks of promissory note investing. We have agreed that predicting future events is very inexact; consequently, a margin of safety is always necessary for every note investment. Since note investing is not a game, it must be approached seriously, as a business, with rules and guidelines designed to avoid the most common mistakes. Following the points outlined above will pay handsome benefits.

Words of Wisdom "Only those who risk going too far can possibly find out how far they can go."

"Pitiful is the person who is afraid of taking risks"

"To assure that you will never experience failure if you:• don't take a risk,• don't attempt anything new,• don't expand on your ideas,• don't set goals."

Lawrence Tepper specializes in:

Promissory Note Appraisal & Valuation--and LLC Valuation and Appraisal

Expert Consulting Services

EDUCATION AND TRAINING

Law Degree /Accounting Minor University of Denver Colorado Real Estate Broker-- Promissory Notes Specialization Certified Commercial Investment Member From National Assoc. Realtors (CCIM)

PRACTICAL EXPERIENCE 35 + years of appraisal and valuation for Attorneys, CPA's, Estates, Trusts, Administrators, and Financial-Investment Advisors.

http://promissorynoteappraisers.com/

Source: EzineArticles
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