1-12 Understand Risk and Investing

Regardless of your choice of investment types, you should learn about and understand the correlation of risk to the size and type of your investments. First, become familiar with the traditional risk levels of various types of asset groups ( [ts]stocks[tm]Stocks are “equity investments” which means that individuals that own stock shares of a company actually own part of that company.[te] , [ts]bonds[tm]A debt obligation of a company, the U.S. Treasury Department, or a city where the borrower receives funds (usually in increments of $1,000), makes semi-annual interest payments based on the coupon rate, and eventually repays the borrowed amount ($1,000) to the lender at the maturity date of the bond.[te], real estate, etc.) and compare this data with classic expected returns in different economic climates.

Use this historical information in conjunction with the projected investment horizon for the future to identify your own comfort level and threat index. Use all the solid expert data you can find. For example, if gold values typically increase when the real estate market spirals downward, build this probability into your investment strategy.

Remember, there is no risk-free rate of return or investment. The key is to establish the risk, evaluate the potential return in light of this risk, and decide which investments suit your personality. Your journey into the investment world has now begun. Enjoy the ride!

Chart of returns over time by investment type.
InvestmentRisk LevelPotential Returns
Bank Certificates of DepositVery LowVery Low
U.S. Treasury BondsVery LowLow
Municipal BondsLowLow – Medium
Corporate BondsLow – MediumMedium
Real EstateLow – MediumLow – Medium
Stocks (Mutual Funds, [ts]ETFs[tm]Exchange Traded Funds are a cross between mutual funds and stocks. ETFs are simply a portfolio of stocks or bonds or other investments that trade on a stock exchange just like a regular stock does. [te] )MediumMedium – High
Precious Metals (Gold, Silver)Medium – HighMedium – High
Leveraged ETFsHighHigh – Very High
OptionsHigh – Very HighVery High
Currency FXVery HighVery High

[mark]The single most important point to consider when investing is to have clear and reasonable objectives, which includes knowing how long you are planning to invest. “Making as much as you can as fast as you can” is not a clear, reasonable objective. “Investing $500 a month and earning a 5% annual return for the next 10 years so I can put my kids thru college” is a clear and reasonable objective. If you are young then you should be taking some risks because you have time working in your favor. If you are approaching retirement age and need monthly income and need to protect your nest egg, then you should consider that in your investment selection.[endmark]

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