Investing Means Taking Risks: Risk vs. Reward

Investing means taking risks .

There are inherent risks in any investment vehicle. Whenever you use your money to try and make money, you are taking a risk. The risk is you may lose some or all of the money you invested. The reason a person invest money in any investment vehicle, is that person is looking for returns. Return is the money you expect to make using the money you invest.

The return should compesate for the risk that you take. For example: A thirty year government bond will return 5% a year in interest. Buy purchasing this bond, you assume very little risk: therefore, your return is small. A stock is paying a dividend of 10% a year. You will make more money because you have assumed more risks. The government bond is backed by the U.S. government. It is very unlikely that you will lose any money. The stock is not backed by anyone. So you stand a chance of losing some or all of your money.

There are not any free lunches in investing. If the investment vehicle promises large returns, you will be assuming a great deal of risk. This is a very important point. THERE ARE NOT ANY FREE LUNCHES OR FREE RIDES. Don't look for any. This will save you a lot of time and money.

Risks is also linked directly to your knowledge. Every investment vehicle has its own unique risks. The person that understands these risks will be rewarded. The person that does not understand the risks will lose money. If you understand stocks, then stocks are not risky. You are willing to assume the risks in hopes of a good return. But for the person that does not understand stocks, that person should not invest in stocks because they will be too risky. In order to be a successful investor, you must stay within your realm of comprehension. Stay within your comfort zone. This will serve you well throughout your investing career.

These are the three points that you should remember:

1. Investing means taking risks. The returns should compensate for the risks.

2. There are no free rides or free lunches.

3. Don't invest in anything that you don't fully understand. Invest only in investment vehicles that you understand.

If you remember and apply these three points, you will be on the road to success.

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