Introduction: Your Different Investment Options and the Benefits of Low-Risk Investments and High-Risk Investments
For both veteran and amateur investors, learning how to understand and gauge risk in your investment options is one of the most important skills to learn and develop.
Investment risk is present no matter what you are investing in, though there are obviously differences between low-risk investment options and high-risk high return investments.
Despite the importance of risks in investments, there is no universally agreed upon formula to calculate investment risk management.
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Rather, low-risk investments and high-risk investments depend on a number of factors that can sometimes be fairly ambiguous.
So, how do you know how to spot risky investments you see them and develop a sound investment risk management strategy?
In this brief article, AdvisoryHQ will look at the different investment options available to investors, from low-risk investments to high-risk investments.
We begin by looking at what most investors agree defines risks in investments.
Next, we will look at different strategies to offset investment risk. For investors looking for a quick return on investment, we will also consider some of the benefits of high-risk, high-return investments.
We will also offer advice on some of the best low-risk investment options while explaining why every investor should learn the principles of investment risk management in order to avoid needlessly risky investments.
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Advantages and Disadvantages
What Defines Risks in Investments?
Despite the fact that investment risk is perhaps the most important factor when considering your investment options, understanding what defines low-risk investments and high-risk investments is not as clear as it may initially appear.
While some investing firms may define investment risk in terms of the volatility of the market, that can be deceiving.
While a volatile market may not remain steady and therefore expose investors to a larger amount of potential outcomes, that doesn’t necessarily mean that those outcomes can be termed as risky investments.
A better way to think of risk in investments is the probability that a certain investment or asset will experience either permanent loss or perform under your expectations.
For example, if you expect your investment to return 5% over a certain number of years, the likelihood that it won’t meet that expectation can be used to determine whether you are investing in low-risk investments or high-risk investments.
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According to Investopedia.com, “If investors accept the notion that investment risk is defined by a loss of capital and/or underperformance relative to expectations, it makes defining low risk and high-risk investments substantially easier.”
With this definition of risk in investment options, it is much easier for even a novice investor to make choices regarding both high-risk investments and low-risk investments.
High-risk, high-return investments come with a high percentage chance of loss of capital or underperformance, while low-risk investment options come with a relatively small chance of a devastating loss.
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How Do You Offset Investment Risk?
While conservative investors who are most interested in avoiding any and all sort of risks in investments, putting all your money in seemingly safe government bonds might not necessarily be the best option.
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When it comes to risk in investment options, it is important to consider not only the probability of some sort of loss, but also the potential magnitude of a loss if it were to occur.
While government bonds are often considered to be low-risk investment options because of the low probability of any sort of loss and a low volatility, if you were to invest all of your funds in government bonds, you would be in major trouble if the U.S.
government suddenly went bankrupt and defaulted on those bonds.
While the probability of that happening is low, the magnitude of such an event if you had all your money tied up in that particular investment option would be devastating.
One of the best ways to limit risky investments, then, is through diversifying your investment portfolio.
There are virtually unlimited investment options on the market from low-risk investments to high-risk investments.
By maintaining a diverse portfolio, you will be able to take advantage of the high-risk, high-return investments when they do well while also protecting part of your funds through low-risk investment options.
As your grandmother probably told you, it’s never wise to put all your eggs in one basket, even if that basket appears to be fairly sturdy.
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The Potential Benefits of High-Risk, High-Return Investments
The possibility of hitting it big on an investment is every investor’s dream. While there is no sure-fire way to read the market, a number of investor “gurus” are always trying to convince you that they have an inside scoop on how to find the best high-risk, high-return investments.
While many high-risk, high-return investments might yield great returns due to the luck of the draw, other high-risk investments by their nature offer the possibility of either great loss or great gain.
For example, investing in foreign emerging markets is a textbook example of high-risk investments.
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These investment options allow you to invest in a country or geographical region that is currently undergoing dynamic economic growth spurred on by certain political events or ties to parts of the global economy.
Getting into these investment options at the right time can lead to massive gains in a short period of time.
However, as is the case with most high-risk investments, there is also the possibility for near-total loss.
The political and economic stability in foreign emerging markets is usually substantially less than in industrialized, developed nations.
The chance of some sort of political, economic, or social chaos occurring could very well place your investment at risk.