Investment decisions are generally run on the same issue as the quarterback making the big decision in the big game, risk and return. Are you trying to win the championship right now? Or are you simply looking to stay in the game for a chance to win it later? Decisions based on your sense of urgency and potential are what drive risk and return decisions. What should you think about when making these decisions?
For what length do you expect to be investing?
Those who are planning to invest for something that is 30 years down the road should consider a high risk, high reward type of situation. Contrastingly, those who have a major event right around the corner should look for less risk, even if it means less reward. Money markets and mutual funds are a better choice for those who don't want to risk much, whereas stock investing offers a better risk/reward scenario for those who have time to whether the storms. Don't lose your retirement or education funds because you went a little further than you should have!
Have an idea of your expected returns.
It is very simple, the more you want to risk the more you can possibly be rewarded. If you want a big return, like 10% then you will take on quite a bit more risk than someone looking for a 5% return. You should know what type of return you want to get because it greatly impacts your investment plan. If you are looking to become wealthy and get large returns on whatever type of investment you want to do then you will have a more aggressive investment plan. If you are older and just looking to supplement your income a little bit or keep your retirement in good shape as the time nears, your investment plan will be a little more conservative.
What level of risk are you most happy at?
This level will rise and fall from person to person and is a very unique aspect of investing. The faint of heart should not partake in the stock market, it will fluctuate and so will your heart rate! Go with bonds or money market accounts that can make you a solid return with little to no risk. The biggest element in working out how much risk you are willing to take are more geared towards your personal situation, specifically how old you are in relation to your end goal and what level of income you can currently get.
If you feel that you'd be hard pressed not to have a need for your money over the next 10 years or so - then you probably need to avoid investing in stocks and shares which gain maximum return over a long investment period.
But if you can leave your money invested for long periods, look to the market to give you a healthy, higher return - on average, a return better than you'll find with most other investment opportunities.
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