Your level of risk tolerance is the most fundamental thing in choosing the right investments for you. Before anything else, it must be understood that investing are like other things in the world: there should be positive and negative side to it. All investments follow 3 common principles. First, every investment takes with it a some of inherent risk. Second, risk and returns can not be separated such that the general principle of higher risk-higher return and lesser return, greater safety is widely accepted. Third, investing in anything for which one has no knowledge of is the kiss of death for the money invested.
With that being said, questions like what kind of risk tolerance investors are you are much dependent on many factors. These factors range from the personally acceptable risk threshold to the professionally proven investment risks.
Acceptable Risk Threshold
In risk management investment, risk is a matter of personal preferences. What is extremely risky for a new entrepreneur will be highly acceptable to the established entrepreneur simply because the personal circumstances with which risk is perceived are different between them?
So, when someone asking you question like what is your acceptable level of risk in investment in the quest to become a millionaire, there are four basic investment goals that will determine the acceptable level of risk to the individual:
- Income: Investments are purchased for the potential passive income that will come regularly. The principal can either be diminished or increased in the process, which is good either way.
- Growth: For this factor long-term appreciation in the market value is sought much more than principal safe and regular passive income flow.
- Speculation: For individuals with high tolerance for losses, speculation leaves for either higher and faster returns or quicker but larger losses.
- Safety: There is minimum risk of loss such that the principal can be returned almost full. This is very conservative albeit very safe; this is suitable for person with low risk profile.
When making investments decisions, individuals will do well to define the category of investors to which they belong to. By doing such things, proper risk-taking measures like gathering information about the desired investments and balancing the risks and return based on the information can be performed.
Likewise, it pays to plan the exit strategy before actually having the investment. Like mentioned previously, by nature investments have the risk of success and failure, which basically means that there must be a safety net when the latter happens!
High-Risk Schemes and Scams
Before you dive into investing, make yourself well informed about the situation, it also pays to do research on the various scams and schemes that will make questions like what are the risky factors or it is completely superfluous. After all, these investment schemes have been the end of the road for some newbie investors like you!
You may heard of Madoff with his Ponzi schemes investment, pyramid schemes (think of multi-level marketing online companies) and boiler rooms (it is the method being used by telemarketers to get your money to join them).
Nevertheless, the most important thing you can do to protect money invested in anything is to know yourself. Remember that investments are meant to make you relatively happy, now and in the future. Don’t forget what Warren Buffet words of wisdom in investing, if you are not comfortable carrying on to something for 10 minutes, you will not be comfortable sticking to it for the next 10 years.
So, how is your acceptable level of risk in investment? It depends on what risks you are willing to take to secure desired returns, one of which is to become a millionaire quick.
