The loss of investment capital is a risk all investors dread. Who wants to lose their hard (even it is easy) earned resources? In fact, studies have shown that investors hate losing money twice as much as they enjoy making it.
Risk is absolutely fundamental to investing; no discussion of returns or performance is meaningful without at least some mention of the risk involved. The trouble for new investors, though, is figuring out just where risk really lies and what the differences are between low risk and high risk.
This then brings us to the question;
What Is a Low or High-Risk Investment?
A high-risk investment is simply an investment where there is either a large percentage chance of loss of capital or under performance. For example, if you were told there’s a 50/50 chance that your investment will earn your expected return, you may find that quite risky. Some times, there are even a 70% chance or more of losing the invested capital; but the high returns rate of which quickly stirs up the greediness to earn more in some investors, lure them into such investment.
If you were told that there is a 95% chance that the investment will not earn your expected return, almost everybody will agree that that is quite risky. Even in the case of a 50/50 chance or in whatever arrangement, the second half, is what you must bring into consideration; not just looking at it from one side of what you can make out of it as your profit. The other part is the one that many investors neglect to consider.
As an investor, what you must bring into consideration is both the likelihood and the magnitude of bad outcomes.
On the other hand, a low risk investment is an investment in which there is just a small chance of losing some or all of your money. there is a low probability of losing some or all of your money. Sometimes, this type of investment are so trusted to yield the expected returns or at worst return the invested capital that it is termed, a zero risk investment. The risk that affects this type of investment is usually economic inflation.
The low risk investment is the type that the comfort zone investor often reclines to; in a bid to be safe than sorry. However, it is good to note that you will not see much of a return on your investment if you decide to put your money into a low risk investment.
Handling Low & High Risk Investments
It is important to note that every investment have some degree of risk, no matter how safe it may seem. Just like there’s an uncertainty of what will happen in the future, tomorrow or even the next minute, so are there some degree of uncertainty of what will become of any money that leaves your pocket into an investment venture. Nothing is ever 100% safe.
Investors need to be willing to look at risks in comprehensive and flexible ways. There is certainly some correlation between risk and return, and investors expecting huge returns are going to have to accept a much larger risk. Knowledge is needful in identifying those investments most likely to achieve their expected returns; but much more than that, it’s important also in correctly identifying the likelihood and magnitude of what can go wrong.
On the bottom line, it’s good not to allow the fears to avoid risks keep you in low/zero risk ‘safe harbors’; such as Certificates of Deposits, bank savings account options, treasury bills and the likes. Instead, acquire knowledge about any investment option that poses itself before you prior to signing up for it and also, consult your financial advisor. It is not financially healthy to keep on playing it low and safe in your investment venture; especially if you want to grow and reach your financial goals. However, it’s advisable you avoid the red lights that screams high risks, and keep your adventures at moderate or minimum risk; not the high side or rest at the low side.
Notwithstanding, some research have pointed out that it is good for beginner investors to start out on their investment journey with the low/zero risk investment options; and thereafter keep it at minimum.
What may be helpful when evaluating how to go about investing wisely with the risk factor as a check, is to consider the risk of failure to reach your financial goals. Your ultimate goal when investing should be to reach your financial goals with the least amount of risk on your invested capital.