Determining Reward Vs. Risk
Determining Reward vs. Risk
The concept of risk versus reward is the basis for not only mutual fund investing, but investing altogether. The same system of risk versus reward can be translated to almost every part of life. When you analyze a situation, you can determine the possible risks of doing something and then the possible rewards of doing something and decide what the best course of action is for you. Determining your risk versus reward strategy for mutual fund investing is key.
The first thing investors of all stripes need to learn is that while mutual funds are a fun, exciting and easy way to invest, there is always a chance, no matter how slim, that you could lose every single penny you invest. That is one kind of risk. The other kind is the risk of not meeting your investing goals that you have set for yourself. This is a tightrope that every investor must walk, determining your risk while trying to earn the reward.
The risk associated with investing can be caused by many different factors. Things like general economic conditions, the rising or falling of interest rates and inflation are just a few factors that can cause a stock or a mutual fund to rise or fall. One of the best parts about mutual funds is that the risk involved in each fund is clearly stated BEFORE you invest. If you're just looking to make a few dollars for holiday shopping, you can do that and keep your risk very low. If you are 25 and have a whole lifetime to invest for your retirement, there are mutual funds that can help you take big chances with even bigger rewards. If you lose your money, it's not as big of a deal since you have your whole life to make it back.
Maybe the best advice you can take when analyzing risk versus reward is the fact that every stock, every bond and, yes, every mutual fund will fluctuate. This is an inarguable truism in the world of investing. There may be a few times when you sit down with your morning paper and you need two antacids with your morning coffee because your fund lost a few points. But with smart investing and good advice, you'll have far more mornings where you leave for work with a smile on your face because your fund is doing well.
Analyzing risk versus reward is a huge part of investing and if you are having trouble figuring out how much risk to take, ask for help. You don't want to enter into investing with a blurry picture of your risk vs. reward. The more you know about your personal situation, the better off you'll be.