Is it worth the risk to invest?
Many people dream of enjoying a carefree lifestyle without the stresses of a regular job, and wish that they could find the perfect investment that would allow them to become wealthy. Their desire to be free from the routine of working for a living is often a compelling reason that motivates them to invest their money.
While most persons invest with an expectation of getting a positive result from their efforts, the reality is that investments don’t come with iron-clad guarantees of success. Last week we introduced the concept that investing activities carry some amount of risk, which is the possibility of getting a negative outcome or a different result than what was anticipated.
The risks that may accompany your investments have a lot to do with the reasons you may have invested in the first place. What are some of your basic expectations when you invest your money?
o You want to get back your initial investment amount (principal),
o You want your principal to be increased within a specific time,
o You want to receive a regular income from your investment.
Accepting the reality of risk
Investing risks may arise if your desired outcomes do not happen at all, or if they take place in a time frame outside of your plans, or if the amount you receive from your investing transactions is less than what you had hoped. In other words, investing risk means that you could lose your money, not receive your money when you want it, or get less money than you had planned.
Let’s say that you invested J$300,000 buying a used car, obtained a taxi operator’s licence and hired a driver. When the driver failed to deliver the agreed weekly payments, you decided to fix up the car and sell it for a profit. However, a major engine problem reduced its value by half. Therefore, your investing venture failed, as you did not receive an income and lost some of your initial principal.
While most people like the concept of making more money by investing, some are terrified at the possibility of loss. If they have made an investment, they watch nervously whenever the value fluctuates and worry constantly about the safety of their money. Whereas risk is a reality, it doesn’t mean that you should panic at the thought of investing and avoid it completely.
If you are excessively concerned about risk, try to increase your comfort level by educating yourself on the subject of investing. Remember also that risk is a possibility not a certainty, and you should consider the likelihood of the negative result taking place. Although there may be a chance of loss, if the probability of it occurring is small, then you can be more comfortable with an investment option.
Managing investing risk
When you’re thinking about investing, ask yourself, “What goals do I want to attain? Can this investment help me to achieve my objectives?” Your investment option can be risky if it’s mismatched with your goals. For example, if you need to have easy access to your money to purchase a property, you should not invest it in an option that may tie up your funds for a long time.
It’s possible for you to have great expectations from investing, but not be in a financial position to commit your money into an investment. Many persons found themselves in risky situations because they invested funds that should have been used for paying bills or reducing debt. Ideally, you should be prepared only to invest money that you can afford to lose.
Before you commit your money into an investment venture, you should look at both the expected return and the potential risks. You have to carefully consider if the return that you hope to make is really worth the possible risks to your money. This delicate balance between investing loss and profit is called the risk/return trade-off.
Making an investing trade-off
The risk/return tradeoff indicates that the higher the return you hope to make from an investment, the higher the risk that may be associated with it. For example, if you are investing with a desire to double your money in a short time, then you should be willing to accept a significantly higher risk possibility that your investment plans may go awry.
On the other hand, if you are not able to absorb the risks inherent in an investment, or if you are uncomfortable with the thought of loss, then you should not expect your investing activities to deliver phenomenal returns. Remember, risk is the price of investing; so you can’t expect to receive a big result without being willing to pay for it.
You can become better at managing risks by learning more about different types of investment options. The more knowledgeable you are about how various investment opportunities work, and the more experience you gain with the investing process, the more comfortable you will be about accepting investing risks.
In upcoming columns, we will continue to introduce you to simple concepts about investing.
This article was written by Cherryl Hanson Simpson, Cherryl is a Financial Consultant and Coach,
and founder of Financially S.M.A.R.T. Services in Jamaica.
Visit her website at www.financiallysmartadvice.com and www.financiallysmartonline.com