Risk vs Reward
In every investing scenario, one of the most important factors that you need to understand is risk vs reward. If you’ve ever made an investment of any kind, you’ve surely heard the terms. Risk and reward. Whether you’re talking about payday loans, stocks, 401(k)‘s, or starting a business, both risk and reward are front and center.
What is risk?
Risk the the potential to lose some, or all, of your original investment. Some investments are zero risk – a savings account is a perfect example. All deposits are fully FDIC insured, and thus guaranteed not to lose value. As long as the US government exists, your savings account is safe. On the flip side, the stock market has no such guarantee. Invest in “penny stocks” and there’s a very real chance that your money could disappear forever.
Ok, how about reward?
The reward is the reason we all invest. Any gain on your original investment is the reward. For that savings account, it’s the interest you accrue. For the stocks, it’s capital gains and dividends.
How are they related?
Just like this: As risk goes up, the potential reward goes up as well. As risk goes down ( toward zero ), then the possibility for reward drops as well. If you’re willing to take a chance at losing your cash, then you also have the possibility to strike it rich. After all, if you’re going to take that chance, then you expect a bigger return, don’t you? Who would invest in the stock market if the average returns were 3%? Would you set out and start your own business if you knew that the most you could make is $20,000 per year?
In every investing avenue, willingness to take on risk is rewarded. Don’t take that to mean that you should make foolish investments. Calculated risk is the key here. Do your homework on volatile and risky investments. Be sure that the possibility for a big payday is actually there – sometimes it isn’t. But don’t be afraid at the same time. Do your homework. Take the risk, and enjoy your payday. If you don’t, you’ll end up asking yourself “what if”, all whilst trying to kick yourself in the rear.
May 13th, 2008 at 12:41 am
Nothing ventured nothing gained.
However everyone’s definition of risk is different. Something that you may think is a risky move may not be that big of a deal to someone else. So it’s important to establish what you are comfortable with in the beginning. As you get more experience your comfort level also increases and consequently the more risks you can take.
But start now, otherwise that “what if” will cost you a lot.
“If if’s and but’s were candy and nuts we’d all have a Merry Christmas.” Grandma would always say.
Enjoyed this post Llama
May 13th, 2008 at 3:52 pm
It sounds like your Grandma was quite a wise woman. I love hearing some of those old phrases / wise sayings. They’re worded strangely but still ring true.