SHARETIPSINFO >> Articles Directory >>Know your investment risk level
First and foremost, we need to understand what is meant by the term “Investment Risk”.
What is an investment risk?
Investments are of three types:
- Low risk
- High risk
- Moderate risk
Low risk investments: Low risk investments the investments that have more stability, but with a lower ROI or low return on investment. At the same time, they are more predictable. You should always try to understand to know your investment risk level.
High risk investments: High risk investments do typically give back a much higher rate of return on investment or ROI, but at the same time, they are more inclined to experience severe highs and excessive lows. This results in an increased likelihood of loss. They are much less predictable than low risk investments.
Here is the catch: any particular investment cannot be segregated as a purely high risk or a purely low risk investment. You should be clear whether you wish to go for long term investments or short term investments. This would help you to get the best profits for you.
Moderate risk investments: The moderate risk investments are typically those that give back a higher rate of return on investment or ROI than lower risk investments but a comparatively lower rate of return on investment or ROI than higher risk investments. At the same time, they are more inclined to experience more highs and lows as compared to lower risk investments and lesser fluctuations compared to high risk investments. Similarly, they are less predictable than low risk investments but more so than high risk investments.
So it is very important to understand the level of risk of the investments before you make any decision to make the actual investment. This would help you stay alert of certain risks in the share market.
Diversification: the best bet!
The best way to ensure a good combination of low risk, better returns and increased levels of predictability is to diversify your total investments. That is, instead of investing all your hard earned money on a single product, it is always better to make your investments in a calculative way and break them down into low risk, high risk and moderate risk investments. This way even if you tend to make a loss on a particular high risk investment, you always tend to even that out or even gain from your other low and moderate risk investments. This is the most sensible thing to do.
Secondly, you must imperatively know the level of your risk tolerance. That is, you must know the extent to which you are able to sustain yourself in the market after incurring losses.
Now for some tips and tricks:
- Know how much capital you can invest. Also, this capital should be one that you can afford to lose and yet be able to sustain yourself. Never invest money that you cannot afford to lose. Also never give in to greed to invest more than your sustainable capacity.
- Calculate your targets. Saying this, I also mean your future targets. Calculate how much readily available money you may need in the future. Subtract these from your investment money. Keep investments aside from all these future expenses, because otherwise, if you lose your investment money, all will be lost.
- Calculate when you would be requiring money back. Never make long term investments if you know that you might need more money back in the short term.
- If you are planning on an early retirement or are generically retiring in the years to come, start saving money on pension plans. That is you can make investment on pension plans. Pension plans ensure that you have a steady income all your life after retirement. Actually, irrespective of your age, you should make provisions for your life after retirement.
- Whatever you do, consider it best to find a scheme to invest wherein you make decent profits, can make better predictions and have an overall lower investment risk.
We have thus understood the concepts of investment risks and their levels. In this way, I hope this information might have helped you to know your investment risk level.
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