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How to Decide on Risk Levels When Investing

Image courtesy of Ged Carroll
Image courtesy of Ged Carroll

If you have decided to invest some money, then you will need to think about how risky you want that investment to be. There are many different types of investment that you can choose from and it is generally the case that you will find that the most risky will give the most potential return.

When you are investing it is important to understand that risk, refers to risk of losing the money that you invest. This means that not only is there a risk that you may not get any return on your investment, but the money that you invest may decrease in value and so when you cash it in, you may get back less than you paid in. This can be devastating and you could even end up with nothing left at all. However, this is rare and it is possible to get a great deal of money back from your investments too.

You need to think carefully about whether you can afford to lose any of your investment, just a small amount or all of it. Generally it would be advisable to only invest money that you can afford to lose and then it will not matter about how much risk you take, but often investments do not work out this way. For example buying a home is an investment and a risk. You buy a house and usually will have a mortgage to pay for it. You hope that the home will increase in value and usually it does. However, sometimes property prices can slump, country wide or in a local area and this means that if you sold, you would not get back what you paid. There are also costs involved with selling a property and so you want to make sure that the increase in value more than covers those costs too.

Some people also invest money for their retirement. They built up a fund to draw out and buy a pension with when they reach retirement age or they invest in a pension which does this for them. This is often seen as a necessity rather than a risky investment. Obviously it is important to have an income when you finish work and you need to think about how you are going to get that. You also need to think about how much of a risk you are prepared to take when you are doing this.

It can be wise to talk to a financial advisor about this. They are likely to explain to you that the longer the term of your investment, the lower the risk that you will end up with less money than you started as values tend to increase in the long term. However, there are differences in investments and you can choose one that is high risk, one that is low risk or something in between. You should be able to get this all explained clearly to you so that you can make the right decision for you.

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Rachel Henderson is a professional freelance writer from the UK. She writes on many subjects but specialises in personal finance. As well as contributing to various blogs and websites she has her own website tracking her own money making process http://www.turnonepoundintoonemillion.com and sells her books through http://www.bowbridgepublishing.com.

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