Investing- Determining Your Risk and Reward

When it comes to investing do you know how to determine your risk and reward? The reality is that investing is not without risk. However it is not without reward as well. If you have ever heard the expression “no pain, no gain” in relation to exercise then you need to know that it also applies to investing as well. 

When it comes to investing do you know how to determine your risk and reward? The reality is that investing is not without risk. However it is not without reward as well. If you have ever heard the expression “no pain, no gain” in relation to exercise then you need to know that it also applies to investing as well. 

What you must do before you decide to invest is to weigh the potential rewards with the risks that you must shoulder. Once you understand the relationship between risk and reward you will then be well on your way to understanding the way investments work and you can start to build your personal investment philosophy.

No matter what type of investment you are thinking about there will be some degree of risk. It is a reality that there is no escaping. There is an investing rule of thumb that says, “The higher the risk, the higher the potential return, and the less likely it will be to achieve the higher return.” You need to be honest with yourself about how much risk you are willing to absorb before you commit to any investments. 

You need to figure out what your comfort level is in terms of investing and from there gauge your level of risk when it comes to investing in a stock or any other kind of investment. Once you know that you will have a better perspective on how to proceed with your investing plan. 

When contemplating investments many people’s first concern is how much money they could stand to lose. You need to consider whether your investments are going to lose you money and whether the safety of your principal is more important than the growth of your money.

You also need to consider whether you will be able to achieve your investment goals. For example, you don’t want to under-fund your retirement in order to achieve your investment hopes. You also need to ask yourself if you are willing to accept more risk in order to contemplate the potential for higher returns. If worry over the risk you are taking with investments is going to prevent you from getting a fitful sleep then you should not overdo your risk quotient.  
The number one risk connected to investments is that they will lose money. This is a worst case scenario for everyone. There are some investments that carry very little risk; however your chances for earning returns are very low as well. For example certificates of deposit (CDs) that come from a federally insured bank are a very secure investment. U.S. Treasury bonds and bills are one of the safest investments around because they carry the faith and the credit of the country behind them.

As far as rewards are concerned however there is not a lot of promise here. The price you pay for low risk is a very low return on the investment. When you calculate in the taxes you must pay on your earnings and the effects of inflation the growth you see from your investment may be very little. It is important to know this from the start so you will not be disappointed.     

In order to achieve your investment goals you must understand the elements inherent in investing. These include the amount of money you invest, the length of time you invest for and the rate of return or growth on your investment. From there you must consider the fees you would be required to pay, as well as the taxes and the inflation.

Risk and reward are a part of investing no matter what type of investment product you are talking about. If you are unable to accept too much risk when it comes to investing then the retune you earn will be less. In order to compensate for the lower anticipated return you will receive you should increase the amount of money that you choose to invest and the amount of time you choose to invest for.