Investing is a balancing act. Savvy investors have to learn to balance the risks of an investment against its potential rewards. High-risk investments offer the allure of huge gains but also the potential for a huge loss. Low-risk investments offer a safer, long-term alternative.
How do you choose between low-risk and high-risk investments? Here are four questions to guide your choices.
Examples of High- and Low-Risk Investments
High-risk investments can include:
- Real estate
Low-risk investments can include:
- Savings accounts
- Money market accounts
As a general rule, high-risk investments offer greater promise of return. But even stocks can have varying risk levels, which is why it’s important to carefully think through every investment decision.
How to Choose Between High- and Low-Risk Investments
How do you choose your risk level? Start with these four questions.
1. What Are Your Financial Goals?
First, think about your financial goals. Are you planning for retirement? Or are you planning for a more immediate goal, such as paying off loans or funding a wedding?
If your goals are long-term, you may be better served with a low-risk investment. You’ll find you have more reliable gains that accumulate over the course of many years.
But if you need money sooner, you’ll need to invest in something riskier. Investing in a tech startup, for example, can be risky, but can also surge forward into unprecedented gains.
2. Can You Absorb the Risk?
Before you jump into a high-risk investment, decide whether you can absorb the risk.
Wealthy individuals can absorb losses more easily. But so can young adults. Young investors can handle greater risk since they’ll have a lifetime to make adjustments to their investment portfolio.
Similarly, one or two risky stock picks can be part of a well-balanced stock portfolio. Pairing high-risk stocks with other low-risk investments can help you take advantage of the potential for gains. But doing so can also mitigate against the possibility of loss.
3. What Is the State of the American Economy?
During periods of inflation or recession, investors would be wise to avoid risk. This is particularly true of stock market investing, where large, stable companies offer lower risk than new startups.
Economic decline can also make it easier to purchase shares of large companies, the share price of which may be lower. This might be a good opportunity to snatch value stocks and reap the rewards when prices stabilize.
4. How Will You Monitor Your Investments?
One of the most important steps in investing is monitoring your performance. High-risk stocks, for example, demand regular scrutiny since they’re subject to market volatility.
If you’re too busy to keep tabs on your portfolio, you may want to consider a low-risk investment. This approach offers growth over time without needing careful attention.
Finding the Right Balance
For many investors, the secret is a diversified portfolio. When you have a healthy mix of high- and low-risk investments, you’ll be better equipped to weather economic downturns and make the most of your financial future.
This article is for information, illustrative and entertainment purposes only and does not purport to show actual results. It is not, and should not be regarded as investment advice or as a recommendation regarding any particular investment action.