20 Creepiest And Scariest Looking Animals In The World Investing Basics – Risk vs. Reward

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Investing Basics – Risk vs. Reward

In 2005, people spent 125% of what they made. They spend money that they have not received so they build up debt, and they pay interest on that debt every month. If you spend less than you make than you actually paid in taxes on your income, it’s just the opposite. The return you can expect from a hard currency depends on the level of risk involved. No risk does not equal any reward yet; danger is not a big scary animal we all run from.

The first thing to decide is how much money you want your investments to make. It can be from 1% to 30% and everything in between. A percentage return is surprisingly low but very safe. Actually, 100% safe because that’s what your savings account pays. If you think you make money in your savings account than you forget to think about inflation. Let’s assume that inflation is around 3% a year. If your investments are making 3%, you break even. You don’t make a dime because inflation takes 3% of the purchasing power your money had a year ago. $100 today is only $97 a year. If you invest 3%, which is $3, you have returned $100. Take 3% off your return and that is your real return.

If you want a high return don’t expect to be risk averse. The higher the game, the higher the risk you need to consider. Bonds currently sit at around 5%. This is 5% safe and you will not lose that money. Once you consider inflation, suddenly it turns into gas money. Stocks have beaten every other investment in any 20-year period. Stocks do the most but there are many ways to enjoy the rewards of the stock market without worrying about losing your children’s college fund. You can buy an index fund that invests in the S&P 500 or the Dow Jones. S&P 500 is 500 companies if you invest $500, $1 will be in every company. The S&P makes around 10% a year. There is a very slim chance that the S&P will go to zero even though there are years of correction. That’s why you need to invest long term. If you start buying in one of the correct years, you will lose money but think long term and you will find to buy rich in those correction years. Buy low and sell high is profitable but many of us do the opposite.

When investing, not only risk and reward are important, but also your age. This may be new to you but age is very important to investing. Age tells us what level of risk we should expect. If you are in your 20s, you should invest in the highest risk funds possible. The reason is that people have a long time to replace that money if they lose it all. The senior citizen doesn’t have those years and the idea is the opposite. Little to no risk and investing in fixed income only which is bonds and CDs and 100% safe alternatives. The older you take the less risk you should allow. 10% of fixed income for every ten years of maturity is the general rule. Do the math and determine your risk level.

There are many safe investments out there but as the saying goes, “no pain, no gain”. The reward for the “pain” is 10% and the return on top you can enjoy.

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