Measuring the Risk of Investment

Written by , March 14, 2011

Measuring the Risk of InvestmentAll investments come with some amount of risk. No investment is safe from potentially losses. For years, real estate was considered the only investment that would never go down, but even real estate has taken a hit over the last several years. Investing is risky business.

The key to choosing the right investment is to find the right balance between risk and return for your needs. Sitting down with an investment professional may be one of the best steps you can take to planning your financial future.

Here is some advice and tips for measuring the risk of investment.

  • Look at the rate of return. A higher rate of return will often be balanced with a higher rate of risk. A Certificate of Deposit (CD) will not offer a very high percentage of interest, but an investor is guaranteed to get the return if the terms of the deposit are met and the bank is federally insured. An investment in a private venture may offer a significant rate of return but offers no guarantees that a penny will ever be seen.
  • Look at your own comfort level. An investor that has more money to risk will see risk at a different level. Understanding your financial foundation will help you gauge the level of risk that an investment costs.
  • Look at the amount of experience or expertise. A person that knows a lot about the industry or the investment opportunity will understand the potential by seeing a bigger picture than someone just looking at the numbers.
  • Look at your patience. Short term investments can hold a higher degree of risk. Most investments (even those in the current real estate market) will see an increase if there is no immediate need to access the funds that are securing the investment.
  • Look at your needs. The faster you need the money to increase, the higher the risk will need to be to get that rate of return. Know what you want and what you are willing to risk for a chance to get it.
  • Investing money at any rate of return can be a scary experience for some people. The recent downturn in solid investments, like real estate, has been trouble enough. Couple that trouble with the wave-like motion of the stock market and new investors are nervous.

    All investments will involve some risk because that is the nature of investing. The higher the rate of return for an investment, the higher the associated risk will usually be. The trick for most potential investors is to understand their own risk tolerance first. Once that factor has been established then it will be easier to find the right investment to meet that level.

    There are a number of different factors that help with measuring the risks of investments. Putting them all into practice will give you a sound foundation for planning your financial decisions.

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