- Personal Finance
The Risks You Take in Investing Your Money
What are people risking in their investments?
With investing, if you take barely any chance at all, then you can run the risk of coming out short in the end. People that have their investments in the safest things like CDs, bank accounts and Treasury bills, have a smaller possibility for any significant reward. This is fine with many people actually, and you can't fault them for it as it is understandable.
Another risk is that you may outlive your assets, and as the percentage of inflation increases, your investments and their growth may not keep up. Thus, you fall behind again.
On the other hand, if you are into speculative investments, you risk losing your principal altogether! That would be awful, but we see it happen. The more you seem to understand the different approaches and strategies, the more likely a person is likely to take a more moderate approach to their investing. These people are willing to balance the potential risks to get the kind of results they are wanting. When this is the case, some will opt to invest smaller amounts into the more speculative investments, while shielding some of their other assets. They also like to keep a fair amount of liquidity to meet any other needs that come up with cash, if need be.
With different types of investments, like corporate and municipal bonds, you run some risks such as if the issuer will default and not pay the principal. With stocks, you risk losing your principal if the shares should decline in their value. Or you lose principal if the company goes bankrupt, which we are seeing so often lately. There are some derivative investments out there that you can lose more than you ever invested into them. So again, doing one's homework can definitely save you money.
It is wise to take volatility into account and the effect that is made when the market conditions change. There are sudden swings in value high to low to high again, and the opposite can be seen as well. The more volatile an investment is, the more you can make in profits of course. You can invest a certain amount, but sell it when it swings and make some money. The spread can be large, and you can cash in on that. The inevitable downside is always there as well, and the price can drop in a big way and you can be stuck.
Be careful that you don't risk buying lower quality or unfamiliar investments that are promising big returns necessarily. Many investors seek out investments with the similar yields that they were able to get during better times. You need to know that these things can result in higher returns but also higher losses as well.
If you sell when prices drop as some do, you might not have the opportunity to take advantage of the situation when the prices go back up.