Theodore Roosevelt once said, “Risk is like fire. If controlled it will help you, if uncontrolled it will rise up and destroy you.”
In today’s world, this quote explains the financial markets well. If you can use risk to your advantage, you can make some significant gains, but if you take an approach that is too risky and it doesn’t pay off, it can come back to haunt you.
There are multiple ways to both increase your risk, as well as to minimize your risk. By finding the right balance that fits your lifestyle and needs, you can maximize your financial gains, while feeling comfortable doing it at the same time.
Determining the right level of risk is different for every individual. In order to determine what is the appropriate amount of risk for yourself, you must first understand the many different investment instruments and their given level of risk.
There are many options to choose from such as bonds, stocks, mutual funds, CDs and many others.
Certificate of Deposits (CDs) are a deposit you can make to a bank that is not withdrawable until a specified date set by the bank. This is a great choice for the risk adverse investor because it is guaranteed to be paid back with interest. The downside to investing in riskless assets such as CDs is the return can be very low. Bonds are a great investment for the investor who is looking to slightly increase their level of risk and reward from that of a CD.
Bonds are also a low risk investment strictly because they are backed by the federal government. They work by paying the government in increments of $1,000.
Once an investor does this, the government will pay the investor a low return until the date of the bond expires, then the investor will get their $1,000 back while also getting to keep the payments they collected during the year.
The returns for bonds are higher than those of CDs, but generally lower than those of stocks.
Stocks are shares of publicly traded companies that anyone can buy. You can buy these directly through the company or through investment services such as Scottrade, Fidelity or many others.
Stocks are unique because once you buy a stock in a company, you actually become a part owner in that company. These are some of the most risky investments, but also some of the most rewarding.
According to Observations and Notes, the average return for a stock the past ten years has been 7.2 percent per year.
This return is much higher than that of your average investment, but this return is not guaranteed. A number of things can happen that can either make a stock jump up or drop down significantly, so investing wisely is of the utmost importance.
After describing just a few of the investment opportunities that are out there, it is up to you, the investor, to make smart and well informed decisions on how to use these to your advantage.
We suggest looking more on your own as to which investment decision most benefits you and how to spread out your wealth.
While you are young you can afford to be more risky as you have more time to make up for any mistakes, and as you grow older, you should consider investing more conservatively.
It will be up to you to choose how you want to diversify yourself between these different investment instruments so that you are not exposed to too much risk and may reap the benefits of being a savvy investor for years to come.
