The principle of “The greater the risk, the greater the reward” is tossed around a lot when it comes to gambling with your financial life. The potential for a great reward attracts many investors, but it’s not guaranteed. Before you put your money into any investment, whether it’s high or low risk, you need to fully understand what you’re committing to, what you might gain, and especially what you might lose.
Understanding investment profiles
Stocks, bonds and mutual funds are the three most common investment types. Stocks may be a popular investment option, but every stock is not created equal. “You could buy stock in established, blue-chip companies that have a fairly stable stock price, and are considered relatively safe. Or, you could choose to invest in smaller companies, such as startups or penny-stock firms, where your returns are much more volatile,” according to The Balance writer Ken Little.
Bonds are generally a safer investment, while mutual funds take some of the stress out of investing because they are typically handled by a third party, a professional portfolio manager. “Mutual funds work like a basket of stocks or bonds, and when you buy shares of a mutual fund, you get the benefit of the variety of assets held within the fund,” he adds.
Weighing the risks
Investing in any account beyond a money market deposit or savings account puts your money at risk, according to Little. You might lose everything if you invest in a high-yield bond or a stock, or your investments might not respond accurately to inflation. If you’re counting on your investments to cover your needs in retirement, there’s a possibility they won’t deliver. Mutual funds can carry hefty fees, which will cut into your return, Little adds.
Taking action
If you’re interested in expanding your credit portfolio with investments, there are steps you need to take before you hand over your money. First, you need to evaluate the financial professional who’s selling you on investing.
According to the Federal Trade Commission, a “sure-fire” investment rarely pays off, and scam artists will pressure you into making a quick decision.
“It’s best to get an independent appraisal of the specific asset, business, or investment you’re considering. An appraisal offered by the promoters could be fake,” warns the FTC. “Discuss all investment ideas or plans with an accountant, an attorney, or another advisor you know and trust.”
Next, you’ll want to know the ins and outs of the investment itself. Finally, you’ll want the financial professional to explain exactly where your money is going. You don’t want the bulk of your investment covering incidental costs such as marketing or commissions, advises the FTC.
The most important risks you need to consider with your investments are your financial health and your comfort level. Can you risk losing your investment? Can you handle the stress of something that isn’t a sure thing? Or do you appreciate a gamble that has the possibility to yield a great return? Once you consider those questions, you'll know if investing is right for you.