The Importance of Understanding the Risks and Rewards of Investing

The Importance of Understanding the Risks and Rewards of Investing

The Importance of Understanding the Risks and Rewards of Investing

How many times have you heard the cliché phrase, “no pain, no gain”? It is usually used to describe something that you do not really want to do, but should do. Unfortunately, it can also be applied to investing because investing carries some risk. With that risk, you may experience some pain, but you may also have some gains.

This is why Northeastern University online MST degree graduates suggest that potential investors weigh the possible reward against the risk of any investment opportunity they are considering. This will help them decide if the potential ‘pain’ is indeed worth the gain. Once you understand the relationship between the risk and the reward, you will understand the key piece of creating your personal philosophy of investing.

Risk

All online MST program students stress the importance of knowing the degree of risk that is associated with investments. This is especially critical if you are using the investment profits as part of your income. Any loss of money in an investment may still need to be reported to the Internal Revenue Service. However, a tax professional will be able to assist you with your taxes.

The general rule is the more risk there is to an investment, the higher the potential return. To completely understand this relationship, it is important that you know your comfort level and you can correctly gauge any relative risk of a certain stock or other type of investment.

Will You Lose Any Money?

The first question people ask when they are considering an investment is, “Is it likely I will lose money with this deal?” However, this question is addressing part of the question. There are other risks that you should consider when you are evaluating any investment.

The first question that you should ask is whether the investment you have chosen is going to lose money. In other words, is the safety of the principal important or is growth more important?

The next thing you will need to consider is if you are able to achieve your investment goal. Finally, you will need to consider accepting more risk so you can possibly receive higher returns. In other words, are the investments you have chosen going to keep you awake at night?

What about Bonds and Bills?

The most common risk with investing is that your investment will lose money. This is different than if you take a personal loss. The good news is that you can make an investment that will assure you that you will not lose money. However, with these investments, you generally lose the opportunity to get a return.

For example, US Treasury bills and bonds carry the credit and faith of the United States government. This is one of the reasons why these issues are considered the safest investments in the world. Certificates of Deposit (CDs) from banks are also federally funded, but these types of investments have very low returns. The effects of inflation and taxes will result in little growth with these investments.

Investors are able to control some risk with the right mixture of stocks and bonds. Risk is an essential part of investing. Investors will need to build their portfolios and expectations based on their comfort level.