Almost all investments involve some level of risk. Differences include: How fast your money is growing, how easily investors can access their funds when they want it, and how safe their invested money is. In this section, we’ll discuss some risks that investors usually face. Risk can occur in many different areas, but there are 3 especially important areas that you should pay attention to.
Stocks Risk – Most people think of the big national companies when they hear about stocks. The reason is easy to see. National companies pay out taxes and stay in business. Smaller companies don’t publish statements that allow you to assess the financial health of the company. It’s impossible to calculate a company’s probability of filing bankruptcy, let alone its probability of becoming a large, blue chip company. There is no “safe” stock to buy, meaning you should avoid stocks of companies that aren’t publicly traded.
Bonds – A bond is simply an investment vehicle with a fixed return. These come from various types of governmental organizations, including the Federal Reserve. When an investor buys a bond, they promise to pay a specific interest rate for a certain period of time. The interest rate will either rise or fall over time, depending on the general state of the economy. Bond interest rates are subject to market forces, so they are considered relatively “risky”, even though they typically have a low return.
Cash Reserves – A cash reserve is another type of investment that is considered relatively “risky”. When an investor purchases a bond or stock, they are paying out a lump sum that is less than the amount they would receive if they were to sell it. Because you aren’t buying or selling shares, this isn’t considered to be income. This is one of the few investment types where the risk is high, but the potential for return is also very high.
Savings Account – One of the safest ways to build your retirement wealth is to purchase a savings account with a low-risk investment mix. A popular combination is money market and savings. Money market funds follow the general trend of falling in value over time. They do not fluctuate significantly, so there is no worry about losing money if the market is falling. If you do not closely monitor the value of your savings account, you can lose out on large gains, but since most people never pull out their money, this is never a risk.
Stock Portfolio – Invests in the broader marketplace is always a good idea for most investors. However, there are some types of investors who may find that investing in the stock market requires too much risk to be comfortable. An effective way to manage risk in this area is to select bonds or mutual funds and invest in the individual stocks of companies that you have an established relationship with. By being invested in the well-known companies, you have more of a guarantee that the company will be able to survive the economic environment in which you operate.
Real Estate Investments – Real estate is another popular area for investment. There are many areas that you can invest in such as rental properties, single family homes, franchises, commercial properties, and other real estate type investments. While real estate typically does not fluctuate dramatically, the returns can be quite varied depending on the area in which you choose to invest. This is another area where many investors tend to fall into the trap of “the more you invest, the better return you will get.” While this may work in the short term, it is not a strategy that you will continue to have long term success with.
The key to investing successfully in any area is to understand risk-free rates and risk tolerance. By educating yourself on these concepts, you will be better able to select an investment mix that you can live with and keep coming back to for years to come. If you have a solid understanding of risk-free rate and risk tolerance, an investor can move their investments up or down the value of the stock and be relatively stable in the process. The best investments are those that have long-term solid returns but also come with the lowest risk possible. Many investors do not have both, so they end up losing money at one point or another.