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Thursday, September 20, 2012

Investment Tips: How to Gauge Your Risk and Rewards

Many people dream of making it big in the investment world today. What you must always do before you make any decision regarding an investment is to weigh the risks and the rewards expected. Understanding the relationship between risk and reward is your first step, with that knowledge you can now start your investment.

People are always concerned about the amount of money they stand to gain, forgetting that investment is a risk taking endeavor. You should, at all times, gauge whether your investment is going to lose your hard earned money or grow it substantially. Therefore, before making any investment decision, understand your risk tolerance. What is more important to you? It is the safety of your investment or the growth of your money.

Determining the risks and rewards of a particular investment opportunity is mandatory and in order to do that, you will need to ask yourself the following two questions questions.

*What are your investment goals?

Consider if your investment project will meet your target. A good example is you don't want to have less retirement funds just to reach your investment ambitions.
The elements that determine whether you will achieve your investment goals are:

  1. The amount you have invested. In most cases the bigger the amount you invest the greater the reward expected.
  2. The duration invested. You need to know how long the investment will take to give its rewards.
  3. Rate of growth or return.
  4. Taxes, inflation, deduction fees etc
Some investment take years to yield profits while others are short term. If you want to increase your reward, you must increase the money you have invested and the length of time invested.
Most investors find a good amount of risk in their portfolio is a good way of increasing their potential of achieving their financial goals. They diversify their portfolios with their investments in various degrees of risk, With the hope of taking advantage of the rising market and protect themselves from great losses in a down market.

* How much risk are you willing to accept for your investment?

The thought of losing money can be the biggest nightmare to anyone. So before you start investing your money think of how much trouble you will go through if the worst happen. If you are going to spend sleepless nights worrying about your money, then that's not an advisable idea. But keep in mind the lesser the risk the lower the reward.


There is no laid down degree of risk an investor should take. This is a very personal decision that you have to make. However a young person can afford a higher risk compared to an older person, this is because a young investor has a lot of time to recover if a disaster strikes. For example if you have five years to retirement, you don't have much time left to recover if you suffer a loss.
But remember a very conservative approach to an investment may mean you will not meet your target.

Investors can have control over some risk in their portfolios by a proper mix of bonds and stocks. Experts think portfolio more heavily weighted towards stocks is much riskier than a portfolio that favors bonds
However risk is a part of investing - you cannot avoid it. As an investor you need to find your level of comfort and then build your portfolio and goals.

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