Assess risks and options: The higher return, the higher the risk
As an investor, you should know that all investments come with risks. However, you can help reduce risk by knowing how to use both time and compound interest at your advantage. You need not put your well-earned money in jeopardy, so read on the rest of the chapter.
Keep in mind the risks involved every time we enter into any transaction. Always remember that there is NO SURE INVESTMENT and that all investments carry risks. When you are offered the opportunity to invest in something, you are practically being asked to lend them you money.
It is important to assess risks as carefully as we can. All investment opportunities come with corresponding risks. So, before engaging in an investment, ask yourself first whether or not you can really afford to lose the money you are investing, just in case an investment turns sour. A perfect example of a high-risk investment would be stocks. Stocks give the most returns but are also the most risky investment. This is because the stock market constantly shifts so returns are unbalanced.
Apart from understanding the risks in a given investment, you must also have a very own risk profile. Risk profiles differ with age, health condition and financial obligations. The extent and timing of the risks you take must be consistent with your financial goals. For example, a man in his fifties in not recommended to invest in high-risk investments such as stocks but should rather invest their money in government bonds in order to protect retirement money. A person in their twenties should not be conservative with their money but rather be aggressive in their investments and put money primarily in stocks, say 80% in stocks and 20% in bonds. This enables maximum growth given he would not remove his money with every little twitch in the stock market.
Successful investing requires that the investor's risk profile matches the type and extent of the attendant risks in a given investment. So, asses the risks involved every time you make choices in your path to financial success. Be Smart!
Here is a couple of risks you would probably encounter:
Keep in mind the risks involved every time we enter into any transaction. Always remember that there is NO SURE INVESTMENT and that all investments carry risks. When you are offered the opportunity to invest in something, you are practically being asked to lend them you money.
It is important to assess risks as carefully as we can. All investment opportunities come with corresponding risks. So, before engaging in an investment, ask yourself first whether or not you can really afford to lose the money you are investing, just in case an investment turns sour. A perfect example of a high-risk investment would be stocks. Stocks give the most returns but are also the most risky investment. This is because the stock market constantly shifts so returns are unbalanced.
Apart from understanding the risks in a given investment, you must also have a very own risk profile. Risk profiles differ with age, health condition and financial obligations. The extent and timing of the risks you take must be consistent with your financial goals. For example, a man in his fifties in not recommended to invest in high-risk investments such as stocks but should rather invest their money in government bonds in order to protect retirement money. A person in their twenties should not be conservative with their money but rather be aggressive in their investments and put money primarily in stocks, say 80% in stocks and 20% in bonds. This enables maximum growth given he would not remove his money with every little twitch in the stock market.
Successful investing requires that the investor's risk profile matches the type and extent of the attendant risks in a given investment. So, asses the risks involved every time you make choices in your path to financial success. Be Smart!
Here is a couple of risks you would probably encounter:
- Risk of inflation - This would probably be the most popular type of risk. We know that money is an ever declining value so we must invest money on investments that grow beyond the inflation rate
- Risk of non-payment - This has to do with the financial credibility of the company or of the person you making the investment offer. You should look at their history for proofs of payment or look into their company profile to see how the company fares.
- Risk of liquidity - When you invest, you should be absolutely sure you won't need the money until retirement. Liquidity typically means how fast you can take out the money in case you need it. Some investments require a certain period of time before the investment matures so check the liquidity of the investment so make sure you can do without the money until it matures. In case of emergencies, you should stash money on a savings bank account as previously recommended.
- Risk of new taxes - Taxes are your worst enemy when investing. Over time, the government may decide to impose a new tax. So, ask yourself what would happen to your investment if ever a change in taxation would occur.
- Business risks - This has something to do with the market, production and finance risks relevant to how the business produces the product or service and how it is financed and delivered to the consumers. How stable is the business you are investing in? Always ask yourself if the company has a sufficient history of profitable operations. Start-up businesses often end up as scams so you need to find out if the business has sufficient sources of financing for equity and working capital.
- Fraud or Scam risks - This has something to do with the integrity of the business process and how it is documented. As yourself If the investment documentation is complete and legally binding. Find out whether the margins of its products provide for all the overhead and marketing expenses.
- Foreign exchange risks - This has to do with the devaluation or revaluation of your currency. You need to understand this factor as it relates to the long-term valuation of your investment.
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