How Risky Are Your Investments?
By Michael Pastore
It depends on your personal risk tolerance and the type of investments you choose. Before anything else, it must be understood that all investments conform to three loose rules. First, any kind of investment carries with it a certain amount of inherent risk no matter how carefully planned it was. Second, risk and returns go hand-in-hand such that the general principle of higher risk, higher return and lesser return, greater safety is widely accepted. Third, investing in anything for which one has no knowledge of is the kiss of death for the money invested.
With that being said, questions like how risky are your investments are often dependent on many factors. These factors range from the personally acceptable risk threshold to the professionally proven investment risks.
Acceptable Risk Threshold
Risk is often a personal perception. What is highly risky for a fledgling entrepreneur will be highly acceptable to the established businessman simply because the personal circumstances with which risk is perceived are different.
Thus, when asking queries like how risky are your investments in the quest to become a millionaire, there are four basic investment goals that will determine the level of risk acceptable to the individual:
- Safety - There is minimal risk of loss such that the principal can be returned almost intact. This is very conservative albeit very safe, which is best for individuals with low risk thresholds.
- Income - Investments are purchased for the possible passive income that will flow regularly. The principal can either be decreased or increased in the process, which is good either way.
- Growth - In this case, long-term appreciation in the market value is desired much more than principal safety and regular passive income stream.
- Speculation - For individuals with high tolerance for losses, speculation provides for either higher and faster returns or larger and quicker losses.
When making decisions about investments, individuals will do well to determine the category of investors to which they belong to. This way, appropriate risk-taking measures like gathering information about the desired investments and balancing the risks with the returns based on the information can be performed.
Also, it pays to plan the exit strategy before actually making the investment. As previously mentioned, investments carry inherent risks of success and failure, which essentially means that there must be a safety net when the latter happens!
High-Risk Scams and Schemes
In addition to gut instinct and informed knowledge, it also pays to do research on the various scams and schemes that will make questions like how risky are your investments completely superfluous. After all, these investment schemes have been proven to be the kiss of death for finances in years past!
These include Ponzi schemes (think of the recent Madoff fiasco), pyramid schemes (think of multi-level marketing online companies) and boiler rooms (think unsolicited phone calls from persistent telemarketers).
However, the most important thing you can do to protect money invested in anything is to know yourself. Remember that investments are meant to make you relatively happy, now and in the future. To paraphrase Warren Buffet, if you are not comfortable holding on to something for 10 minutes, you will not be comfortable clinging to it for the next 10 years.
So, how risky are your investments? It depends on what risks you are willing to take to secure desired returns, one of which is to become a millionaire fast.
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