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Risk vs Reward in Investing

Updated on February 16, 2012

Investing

Everyone would like to make more money in life, even if it is just so they can live comfortably and help their loved ones live comfortably, or maybe even so they can give to the poor and needy. Whatever the reasons are, investments are a great way to increase your net worth over time and have your money work for you.

We often get caught up in the rewards of investing, as after all, that is the point. Its good to be careful with the risks as well and to fully understand the chances you are taking and the possibility for loss. Of course, the greater the risk you take, the more chance you take to gain or lose.

There is such a wide range of investment choices that also come with the risk factors. This is often described as a pyramid and it is encouraged for instance, to have a solid cash base. The cash base should be enough to cover about three to six months of your personal living expenses. The main bulk of one's portfolio ought to be in limited and only moderately risky investments. The top or smallest portion of your "pyramid" ought to have your highest risk investments. Its a good mental image to keep in mind, especially if you begin to get a bit more "top heavy" in your investments.

Source

Different Levels of Risk

Government bonds for instance, are lower risk investments and guarantee that you will get your money back, plus the added interest. Going to higher investments, like buying stock in a brand new company have no guarantees at all. Of course the temptation is that possible reward should the company do very well would result in a lot of money for you.

It is good to keep in mind that there really is no such thing as zero risk in regards to investments. We have seen historically that things which we cannot foresee such as big recessions or depressions, or high inflation can bring on their share of problems. This is where investment strategies can come into play. Being wise and strategic can make a huge difference.

Image of the story of the rich man and Lazarus
Image of the story of the rich man and Lazarus

Being Strategic

We see many financial experts that give advice on what has helped them, and adopting some of those ideas may be helpful for our own situation. So look around and see what the successful people are doing. Learn also from those that have made huge mistakes, and don't make those same mistakes. Thus enters the "gamble" for the times when you just can't know for sure what direction things will go.

Two main things to keep in mind that will be helpful are to make sure you diversify. Have a variety of investments in your portfolio. Do come up with a strategy as a guide for the way you choose what your investments will be. The strength of the financial market overall is not made or broken on how well a single kind of investment does. It depends on how the whole range of different investments do over a period of time.

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    • oceansnsunsets profile imageAUTHOR

      Paula 

      7 years ago from The Midwest, USA

      Thank you PhoenixV! Glad you stopped by.

    • PhoenixV profile image

      PhoenixV 

      7 years ago from USA

      Great advice thanks.

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