Risk and Return: Bosom Buddies of the Financial World

Risk and return are two terms that you will have to become familiar with if you plan on having success in the investment world. These two terms always go together with any type of investment. Here are a few things to consider about risk and return and how they relate to one another.

Tradeoff

When dealing with risk and return, you are essentially dealing with a trade off. With every type of investment, you are going to have to consider the risk when looking at return. As the potential returns of an investment increase, the risk is bound to increase as well. This means that if you want to achieve higher returns, you are going to have to be willing to accept the fact that the risk is increased as well. There is really no way to completely get around this correlation.

Be Prepared to Lose

In order to increase your gains, you are going to have to be prepared to lose your investment. Despite what many people will claim, there is no such thing as a risk-free investment. This is especially true when you get into investments that can bring you a higher return. You need to understand that you could potentially lose your entire investment at any given moment. If you are not alright with this concept, you do not need to be investing.

Risk Tolerance

As an investor, you are going to have an individual risk tolerance that you need to be aware of. Some people are completely fine with the idea of taking on additional risk. At the same time, many investors are terrified that they will lose their initial investment. Some investors are fine with the idea of taking on some risk, but at the same time they want to be conservative with their funds. You need to determine what your individual risk tolerance is as it will influence all of your investment decisions.

Delicate Balance

Your goal as an investor is to find the proper balance between risk and return. You do not want to create a portfolio that is made up of investments that are extremely risky. At the same time, you do not want to choose investments that are completely safe because you will not get anywhere with your investing. Try to choose investments that are somewhere in between.

Example

In order to understand this concept, it can help to look at some of the different securities that are available. If you are an individual that likes to take on risk in order to get extra returns, you might want to invest in growth stocks. These stocks can provide you with exceptional returns at times. However, these stocks are very volatile and you could lose your entire investment.

If you are the type of investor that does not like risk, you might be better suited to put your money into a CD. By putting your money into a CD, your investment will be insured by the FDIC up to $100,000. By choosing this method, you are going to be able to earn a modest return on your investment.

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