Risk and return, Financial Management

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Alice

2/14/2013 12:21:37 AM

Risk and Return

Surely, you''d like to make a fortune in the markets -- who wouldn''t? The first thing you require to understand, before you commit even a dollar to a portfolio or start surfing investing Websites, is that it''s impossible to realize a return on any investment without facing a specific degree of risk.

As per to Webster''s, risk is the "possibility of loss or injury." In investing, risk is the chance you take that the returns on a particular investment may change. That''s other way of saying that there are no sure things while you''re investing.

No matter what you decide to do along with your savings and investments, your money will all the time face some risk. You could stash your dollars within your mattress or in a cookie jar, but after that you''d face the risk of losing it all if your house burned probably less dollars in real terms than when you started. Investing in stocks, bonds, or mutual funds carries risks of varying degrees.

The second fact you require to face is that in order to receive an increased return from your investment portfolio, you require to accept an increased amount of risk. Keep your money in a savings account reduces your risk, but it as well reduces your potential reward.

Whereas risk in your portfolio may be not avoidable, it is manageable. The riddle of controlling risk and return is that you require maximizing the returns and minimizing the risk. When you do this, you make sure that you''ll make enough on your investments, with an acceptable amount of risk.

Thus, what constitutes acceptable risk? It''s different for each person. A good rule of thumb followed by several investors is that you shouldn''t wake up in the middle of the night worrying about your portfolio. If your investments are causing you so much anxiety, it''s time to reconsider how you''re investing, and bail out of those securities which are giving you insomnia in favor of investments that are a little less painful. While you find your own comfort zone, you''ll know your personal risk tolerance -- the amount of risk you are willing to tolerate in order to attain your financial goals.

While it comes to your long-term financial future hence, the biggest risk of all may simply be to do nothing. If you do not invest for retirement, or for the college education of your children, or to assist to meet your personal financial goals, then you''re most likely guaranteed a future of just scraping by.

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