Risk and reward are directly proportional to each other. The greater the risk, the greater the reward or loss. The lower the risk, the lower the reward or loss.
When you are younger you can still take high risk from legitimate investments such as the stock market since you still have a long time available to recover from loses before your retirement. Note that the risk in investing in individual stocks is very high so be very careful and make sure that you diversify. I will be discussing stocks, index funds and diversification in some of my next notes so make sure to read them when they are posted.
If you are old and getting close to retirement, your investments should be at lower risk. The assumption is that you no longer have enough time to recover from loses and that your potential to earn more from working is no longer as good as when you were young. It takes years for an investment to recover from loses and sometimes it doesn’t even recover so you don’t want to be in that situation.
It is hard to find a low risk business or investment that will give you high reward. Remember this when someone is trying to offer you an investment opportunity and convince you to give them your hard earned money. If the promised return on investment is high (for example more than 12% per year) then be cautious since having that kind of return is accompanied by a high chance that you could also lose money.
There’s also a lot of scams out there so your best chance to manage your risk and not lose money is to have proper information. The more information and financial knowledge you have, the better your decisions will be. Again as I mentioned in one of my notes before, never make financial decisions based on emotion. Scammers will try to get you excited or make you feel like you will miss out on a chance to make a lot of money to reel you in. Be cautious of your emotion and make your own risk assessment before making a decision. Always remember the higher and quicker the reward is, the bigger and quicker the loss is.
If ever you decide to take high risk investments, make sure that it is indeed a legitimate investment and not a scam and be prepared to see the value of your investment going down for some or even a long time. That’s the reality of high risk investments in exchange for the potential high reward that you will get from it. Notice that I used the word potential because there really is no guarantee that an investment will yield a positive result. We can only look at the available data from history but we can’t guarantee that it will have the same performance in the future.
