“Every day, you'll have opportunities to take chances and to work outside your safety net. Sure, it's a lot easier to stay in your comfort zone. .in my case, business suits and real estate. . but sometimes you have to take risks. When the risks pay off, that's when you reap the biggest rewards. ” -Donald Trump
The risk reward strategy of investing is the idea that the higher the risk of an investment the larger the return will be. Any type of investment opportunity is going to have an associated risk. Risk refers to the likelihood that you might lose the money you have invested.
Investors who choose to buy high risk stocks are rewarded, if all goes well, by a higher return. A key component in being a successful investor is to determine your risk level and use that level to guide your investment decisions.
Risk levels differ from individual to individual. Therefore, it is hard to create a model which can offer a generalized formula. In determining your risk level, there are two things to keep in mind: time and available capital. Before you dive head first into investing, make sure you have a set amount of time you can keep your money invested. Ask yourself “When will I need to use this money?” For example, if you have $50,000 dollars to invest but in two years you will need that money for your kid's education then your risk level is low.
If the time you have to invest your money is short then you need to invest in options which are stable and consistent. High risk options are not appropriate because if these stocks perform poorly, you will not have enough time to stay invested to make your money back. On the other hand if you have $50,000 dollars available today and you have at least 10 years until you are going to need the money, your risk level is high. You can invest in higher risk options because you have time to recover from an investment that performs badly.
Available capital is another thing to consider when determining your risk level. Make sure you only invest money you can afford to lose. Do not invest next month's mortgage payment or your quarterly college tuition. Only use money that you can afford to do without for several years. The more available capital you have the more risk you can tolerate. Knowing and understanding your risk level is extremely important in being a successful investor.
Risk levels differ from person to person. Do not assume that your best friend's risk level is your own simply because you share similar situations. If you are interested in investing and do not know your current risk level seek out a financial advisor who can work with you to analyze your financial situation, what your risk level is, and what you should invest in.
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