Don't Take Unnecessary Risks

Risk and investing go hand and hand, but don't take unnecessary risks . In fact, risk can be defined as the chance one takes that all or part of the money put into an investment can be lost. That is the bad news. The good news is that investng risks comes with the chance for investing reward. The chance for investing reward is what makes the whole process worthwhile. Risk is the chance that you take that one investment may lose money or does not deliver a return greater than another investment. If you can't reasonably expect to do better than that for the money risk being taken, there's no sense in taking the risk.

There is no such thing as a no risk product. Even savings accounts and certificates of deposit carry risks. These investment products carry the risks of inflation. Inflation is when the costs of things go up. If you have your money in a savings account earning 2 percent. If inflation is 3 percent, then you have lost money. I know you are thinking that if I get 2 percent interest, then how have I lost money? It is simple. The money you have in the savings account has lost purchasing power.

Let's say you wanted to purchase a car tire next month. The car tire cost $102. You place $100 in a savings account earning 2 percent interest. Next month you will have $102 in your savings account. That's $100 in principal plus $2 in interest. Next month comes and you go to purchase your tire. When you get to the store, the same tire that costs $102 now costs $103. That is inflation at work. Inflation is running higher than the interest you are earning. That is the risk you are taking when you put your money in a savings accounts. Also you will lose on this investment becauses you still have to pay taxes on the interest you earned.

Think of investment risk like a pyramid. You must have a broad solid base. The base will be composed of very low risk investments. As you move up the pyramid, the levels get narrower, to represent the money left to invest in riskier investment. The base is the lowest risks. The top is the highest risk.

Each investment product has it own unique risks inherent in that product. You must understand the risks involved. The basic thing to understand is that risk increases as the potential return increases. Don't forget potintial returns. There are no gaurantees.

High risk and low risk are directly related to your knowledge of the investment your are investing in. To a person that understands stocks, futures and options, they are not risky. That person understands that investment vehicle. For a person that does not understand these type of investment products, they are very risky. You must understand the investment product.

Always remember one thing: there are no free rides or free lunches. If a product or promoter of a product promises large returns, you will be assuming a very large risk. You will more than likely lose all of your money.

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