In the investment world, it’s very easy to get confused about the word risk. When most Americans hear the word risk, they usually associate it with something negative. Many people automatically associate it with losing your money. While risk can wipe out your investment capital, there is more to it than that. The real story behind risky investments is that risk is the necessary price you pay to get a certain rate of return. The rule is actually quite basic. The higher the risk, the greater the reward. It is no surprise that government bonds and certificates of deposit pay such little money because there’s almost no risk there. However, there is still risk because inflation can eat into the value of your investment.
A better way to view risk is to look at it with a different attitude. Instead of looking at risk as something to fear and run away from, look at it in terms of the return profile it comes with. Instead of avoiding risk, assume the right risk depending on the rate of return you’re looking for. This way, you are able to plan a certain rate of return by assuming a certain level of risk. Another key thing to keep in mind when it comes to risky investments is that risk is both categorical and specific. There are certain asset classes that are inherently risky. For example, joint bonds are riskier than government bonds. Derivatives are riskier than other assets. However, within that asset class, there are specific investments. Among these specific investments, there are a wide variety of risks among these different investments. Keep this analysis clear in your mind. Just because one particular asset investment option in an asset class is high-risk doesn’t necessarily follow that asset class as a whole is risky.