Investing Basics: Risk vs. prize

Website design By BotEap.comIn 2005, people spent 125% of what they earned. They spent money they hadn’t earned yet, so they accumulated debt and paid interest on that debt every month. If you spent less than you earned than you were actually paid interest on your money, quite the opposite. The return you can expect on that hard-earned money largely depends on the level of risk associated with it. However, no risk equals no reward; risk is not some big scary animal that we all run from.

Website design By BotEap.comThe first thing you need to decide is how much money you want your investments to generate. It could be 1% to 30% and everything in between. The one percent return is incredibly low but very safe. Actually, 100% sure since that is what your savings account pays for. If you think you’re making money in your savings account, you forgot to think about inflation. Suppose that inflation is around 3% per year. If your investments are earning 3%, you have broken even. He didn’t earn a penny because inflation took 3% of the purchasing power his money had a year ago. $100 today is only worth $97 in a year. If you invest at 3%, which is $3, it comes back to $100. Get 3% off your return and that’s your actual return.

Website design By BotEap.comIf you want high returns, don’t expect to be risk averse. The higher the reward, the higher the risk you need to take into account. Bonds are currently sitting around 5%. This is a safe 5% and you will not lose that money. Once you factor in inflation, it suddenly becomes gas money. Stocks have outperformed any other investment in any 20-year period. Stocks shrink the most, but there are plenty of ways to enjoy the rewards of the stock market without worrying that you’re losing your kids’ college fund. You can buy an index fund that invests in the S&P 500 or the Dow Jones. The S&P 500 is 500 companies if you invested $500, $1 would be in each company. The S&P earns about 10% a year. There is a very small chance that the S&P will hit zero, even though there are years of correction. That is why it is necessary to invest for the long term. If you start buying in one of those correct years, you will lose money but think long term and you will realize to buy strong in those correcting years. Buying low and selling high is the game, but many of us do it the other way around.

Website design By BotEap.comWhen investing, it is not only risk and reward that is important, but also your age. This may be new to you, but age is very important to invest. Age tells us what level of risk we should expect. If you are 20 years old, you should invest in the riskiest funds possible. The reason is that a person has more time to replace that money if he loses everything. An older adult does not have those years and the advice is quite the opposite. Little or no risk and invest only in fixed income, which are bonds and CDs and 100% safe alternatives. The older you are, the less risk you should allow. 10% fixed income for every decade you have is a general rule of thumb. Do the math and determine your level of risk.

Website design By BotEap.comThere are many safe investments, but as the saying goes, “no pain, no gain.” The reward for “the bread” is the 10% and more return that you could enjoy.