There are many misconceptions about investing, particularly surrounding the concept of risk. Some may have the idea that any kind of investing is entirely too risky, while others may assume that it’s a sure way to get rich quickly. The truth is somewhere in the middle of these two ideas. It can help if you understand the difference.
Low Risk
One type of low-risk investment is something that is safe and stable and unlikely to drop in value. Examples are bonds and certificates of deposit. This is what most people think of when they think in terms of low-risk, but there is another way to look at it as well. It can also mean a strategy that minimizes loss. This could mean putting your money in a variety of different vehicles so that even if one plummets, you have plenty of others to fall back on.
High Risk
In contrast, these investments may be extremely volatile, meaning that you could become rich very quickly or you could lose everything that you put into it. The latter may be more likely than the former. One strategy that is considered high risk is day trading. With this approach, in contrast to the conventional wisdom of parking your money in stocks and leaving it alone without getting distracted by normal market fluctuations, day trading involves a high volume of buying and selling. If you are interested in day trading, you can review a guide to help you get started. Other examples of high-risk investments are certain types of stocks. For example, biotechnology stocks can be volatile because they could be based on research into drugs or cures that ultimately do not pan out. Investing in cryptocurrency markets is another example of higher risk investments due to the volatility of digital currencies. Just like in day trading the volatility makes these investments higher risk but they come with much bigger profit potential.
Which One to Choose?
Neither is inherently superior to the other. Choosing what is best for your portfolio should be based on a number of different factors. If you are younger, you may be able to take bigger chances because you have decades to recover from any losses. On the other hand, if you are investing in hopes of reaching a specific goal, such as retiring early or paying for your child’s college education, you may want to make more conservative choices.
Another thing to keep in mind is that high versus low is often a matter of degrees. Purchasing stock shares from an established company can feel very safe, but even major companies fail sometimes, so this is still not as safe as something like a government bond. Finally, you should remember that there is a danger with some of the safest investments in that they may not keep pace with inflation.
Diversification
Diversification, meaning that you spread risk across many different investments, is an important element in managing risk. This also helps highlight the difference between wealth and income by showing you what elements are earning you money, and how much of it. It can mean that you ultimately have a reasonably safe portfolio even if you include a few volatile choices. By contrast, putting all of your money into a single, reasonably safe investment can actually be less secure than spreading it across a variety of vehicles that are low, medium and high risk.
