Risk and Reward are Part of Investing Understanding Risk
No pain, no gain. How many times have you heard that cliché to describe something you really didnt want to do? Unfortunately, investing carries a certain amount of risk and with that risk can come some pain, but also some gain.
You must weigh the potential reward against the risk of an investment to decide if the pain is worth the potential gain. Understanding the relationship between risk and reward is a key piece in building your personal investment philosophy.
Carry Risk
All investments carry some degree of risk. The rule of thumb is the higher the risk, the higher the potential return, but you need to consider an addition to the rule so that it states the relationship more clearly: the higher the risk, the higher the potential return, and the less likely it will achieve the higher return. Investors can control some of the risk in their portfolio through the proper mix of stocks and bonds. Most experts consider a portfolio more heavily weighted toward stocks riskier than a portfolio that favors bonds.
Risk is a natural part of investing. Investors need to find their comfort level and build their portfolios and expectations accordingly.