When it comes to financial planning and understanding investment risk, many people adhere to the age-old adage, “Nothing ventured, nothing gained.” After all, it stands to reason: if a small investment has the potential to make a small turnaround, a large investment has the potential to make a large turnaround. And large turnarounds are where fortunes are made, so bigger equals better. Right?
Yes, absolutely. And no, not necessarily.
Taking on large amounts of investment risk is a slippery slope, and the choice to attempt the journey is one of the most important financial decisions you will ever make. Where to place your financial investment and how much you’re willing to stake on the odds and the current market should be the result of a close evaluation between you and your financial planner – not a whim or a desire to double your money overnight.
Some of the things to consider when evaluating the level of investment risk you’re willing to take on include:
Your End Goal
For example, many people play it safest when it comes to retirement funds. Few people are willing to play with the money they expect to get them through their golden years, and even fewer welcome the idea of working well into their 70s or 80s. However, retirement funds are actually one of the places where a little risk can go a long way.
Because you’re looking at decades in which to get your money safely tucked away, you not only have a little more “wiggle room” in terms of the ups and downs of the market, but you also have to consider the role that inflation plays in your investment. A steady 3 percent annual return might sound good at first, but because inflation usually decreases the value of the dollar at the same rate, you might end up with a nest egg that has done little growth on its own.
Your Level of Comfort
Financial investments should be a comfort to you, not a burden. Someone who is familiar with economics and the fluctuations of the market might be more comfortable undertaking risky ventures than someone who is new to the field. That’s because in the financial world, things can change overnight, and what seems like a good idea now might be a bad idea later (and vice versa). If you are the type of person who needs more control over your investment, or if you envision long, sleepless nights when things take a turn for the worse, your sanity and your health might be bettered if you stick to more modest ventures.
Your Income and Lifestyle
Of course, one of the most important things to consider when making a financial investment is how much money you have to begin with. While thousands of dollars in savings or a healthy portfolio are certainly great places to be financially, they aren’t a requirement in order to get started with a solid financial plan. Those just starting to explore their financial options, or those who have financial obligations to family, are often better off playing it safe until they become more familiar with making investments and have a larger amount of money to put in riskier ventures.
No matter what you decide to do with your investment, remember that your financial planner is one of the best places to turn for advice. When you work with a firm or individual you trust, you’re much more likely to get the kinds of straight, honest answers that will result in the best possible outcome for your financial future.
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