1-12 Understand Risk and Investing

Regardless of your choice of investment types, you should learn about and understand the correlation of risk to the size and type of your investments. First, become familiar with the traditional risk levels of various types of asset groups ( stocksStocks are “equity investments” which means that individuals that own stock shares of a company actually own part of that company. , bondsA debt obligation of a company, the U.S. Treasury Department, or a city where the borrower receives funds (usually in increments of $1,000), makes semi-annual interest payments based on the coupon rate, and eventually repays the borrowed amount ($1,000) to the lender at the maturity date of the bond., real estate, etc.) and compare this data with classic expected returns in different economic climates.

Use this historical information in conjunction with the projected investment horizon for the future to identify your own comfort level and threat index. Use all the solid expert data you can find. For example, if gold values typically increase when the real estate market spirals downward, build this probability into your investment strategy.

Remember, there is no risk-free rate of return or investment. The key is to establish the risk, evaluate the potential return in light of this risk, and decide which investments suit your personality. Your journey into the investment world has now begun. Enjoy the ride!

Chart of returns over time by investment type.
Investment Risk Level Potential Returns
Bank Certificates of Deposit Very Low Very Low
U.S. Treasury Bonds Very Low Low
Municipal Bonds Low Low – Medium
Corporate Bonds Low – Medium Medium
Real Estate Low – Medium Low – Medium
Stocks (Mutual Funds, ETFsExchange Traded Funds are a cross between mutual funds and stocks. ETFs are simply a portfolio of stocks or bonds or other investments that trade on a stock exchange just like a regular stock does. ) Medium Medium – High
Precious Metals (Gold, Silver) Medium – High Medium – High
Leveraged ETFs High High – Very High
Options High – Very High Very High
Currency FX Very High Very High

Mark's Tip
The single most important point to consider when investing is to have clear and reasonable objectives, which includes knowing how long you are planning to invest. “Making as much as you can as fast as you can” is not a clear, reasonable objective. “Investing $500 a month and earning a 5% annual return for the next 10 years so I can put my kids thru college” is a clear and reasonable objective. If you are young then you should be taking some risks because you have time working in your favor. If you are approaching retirement age and need monthly income and need to protect your nest egg, then you should consider that in your investment selection.

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