If you have heard about the saying “No pain, no gain”, then the investment market is a ground which surely re-asserts the truth of it in numerous incidences. Investing your money always comes with its share of risks and along with it, chances of pain or GAIN.
History shows that people who have always been very careful with their investments have had a decent income out of their outlays, more or less, but rarely have they been able to make grand profits in their ventures. This is because, in the investment market “Risks” and “Rewards” always go hand-in-hand and understanding the thread which connects their potentialities is the key to building a sound and profitable personal investment strategy.
Understanding your investments and your emotions
The golden rule of investment which emerges therefore is not to play it too safe with investments, always, and to let loose the pixie in you, at least sometimes, to take risks and gain rewards in your ventures. Why take risks? Because, the ruling principle of the investment market is “Higher risk, higher return” and taking risks can sometimes turn out to be very, very rewarding. Money, as seen in the light of current economic condition, is just a number today. If you invest like an astute investor by estimating the relative risk of the investment option that you have chosen, with a clear understanding of YOUR comfort level, YOUR financial objectives and YOUR risk taking capacity, your chances of gaining a higher ROI becomes stronger.
Controlling your emotions during the procedure and life of an investment is the key to big returns. For instance, if the stock market takes a nose-dive and the economy hits a downturn, most people will want their money out of the investment portfolio, to keep it safe, protected and secure. A safe measure indeed, but think about those who choose not to play safe – yes, these are the people who will reap the best benefits when the market climbs back up yet again. And those who did play safe at the crisis hour will end up losing more than they actually could have made. It is worth while to mention the investors that keep money in the market usually have the knowledge and reasearch of determining a particular investment value.
Would one lose money if one take risks?
This is the most common question from investors, regardless of newbies and pros, as every investment involves money and losing out on it can be truly a significantly devastating episode for each of them. While the scale of risk can vary from investment option to option, universally it has been seen that the higher up the ladder of risk that you invest, the greater are your chances of making noteworthy capital growth.
But yes, correspondingly there is also a high possibility of losses. So what to do? Not to take risks? Or take risks and wait for the bigger boom? Well, if you have a fairly favorable attitude toward taking risks, you can sign-up for the last option BUT be clearly convinced that your asset allocation is matching your risk taking position. You must not lose your sleep over an investment.
3 important questions to ask while taking investment risks:
• Which is more important – safety of funds or growth of funds?
• Is the investment goal accomplishable?
• Equipped (both emotionally and financially) to take risks to gain rewards?
As for your worries about losing money, it can be said that risk is an implied facet of investing: share market can plummet, economic conditions can amend and companies can see a range of trading fortunes. There are several types of asset classes accessible to invest in each option with typical risks attached to them. While these inherent risks cannot be 100% avoided, they can be moderated in relation to the overall investment folder, by diversifying. By spreading out your investment over an extensive variety of asset classes, avoiding risk is possible. Your investment portfolio thus does not become excessively reliant on one specific asset performance.
It is worthwhile to mention in this regard that specific risk free investment options also exist like Bank Certified Deposits and Fixed Deposit schemes from federally insured organizations, but not without the price of a low ROI. If you work out the inflation effects on your investment and the payable taxes that you need to shell out on earnings, your investment returns may project very little capital growth.
How much risk is not too much?
The comfort level of risk varies from person to person and to find out your own specific comfort level you need to ask yourself –
Willing to endure higher volatility for superior (potential) returns from investment?
Several factors can influence the answer to this, which include-
• Family circumstances
• Financial objectives
Mind you, playing very safe can help you generate a very nominal income from your investments and NOT something grand. On the other hand, if you pick a right mix of investment “types” and “styles” in your investment portfolio, with risk ranging from moderate to high, your capital growth can significantly improve. Consulting a financial adviser to assess the potential risks and benefits of an investment is the key to rewarding investment results.
There is no need to always play it safe in the field of investment, since, as an investor, you do have some amount of control over the risk factor that you embed in your portfolio. Diversifying your investment in various asset classes like stocks, bonds, fixed income investments and mutual funds can help you to handle the risks better than putting all your eggs in one basket.
Ideally, your investment portfolio must provide a certain degree of protection during unavoidable market downturns and must be arranged strategically for opportunities when the market becomes live again.
To be an astute investor, you must also be in control of your investor sentiment and be prepared for volatile market conditions in the economy. In the event of uncertainties remember to keep your calm and seek the advice of your financial advisor. If your financial goals still hold significance, think twice before deserting specific investments because of market negativity. Remember that you originally created the investment portfolio on the basis of a time frame, your specific risk tolerance capacity and financial goals. Quick, impulsive decisions can foil your chances of accomplishing your financial objectives more than ever.