Investment basics – risk against reward


In 2005, people spent 125% of what they made. They spent money they had not yet earned so they accumulated debt and paid interest on that debt every month. If you spent less than you earned, you were actually paid interest on the money, quite the opposite. The return you can expect from that hard earned money largely depends on the level of risk associated with it. However, no risk is equal to any reward; risk is not the big scary animal we all run away from.

The first thing you need to decide is how much money you want your investment to make. It can be from 1% to 30% and everything in between. The return of one percent is incredibly low, but very safe. In fact, 100% safe because it pays your savings account. If you think you are making money in a savings account, you forgot to think about inflation. Suppose inflation is around 3% per year. If your investment is 3%, you are broke. You didn’t earn a cent because inflation took away 3% of the purchasing power you had a year ago. $ 100 today is only worth $ 97 in one year. If you invested 3%, which is $ 3, you will return to $ 100. Get a 3% discount on your return and this is your actual return.

If you want a high return, don’t expect that you won’t be at risk. The higher the reward the higher the risk you have to consider. Bonds currently sit around 5%. This is a safe 5% and you will not lose that money. Once you take inflation into account, it suddenly turns into gas money. Shares have beaten every other investment in any period of 20 years. Stocks are the most chills, but there are many ways to enjoy rewards with stocks without worrying about losing your children’s college fund. You can buy an index fund that invests in the S&P 500 or Dow Jones. The S&P 500 is 500 companies if you invest $ 500, $ 1 would be in each individual company. S&P makes up about 10% per year. There is a very small chance that S&P will fall to zero even though there are years of corrections. So you have to invest in the long run. If you start shopping in one of those correct years, you will lose money, but think long term and you will realize that you are buying hard years. Buying a little and selling high is a game, 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 for investing. Age tells us what level of risk we should expect. If you are in your 20s, you should invest in the funds with the highest risk. The reason is that a person has to replace that money for longer if they lose it all. The senior citizen is gone that year, and the advice is just the opposite. Little or no risk and invest in only a fixed income, which are bonds and CDs and 100% safe alternatives. The older you are, the lower your risk. Generally the rule is 10% fixed income for each decade you have. Calculate and determine the level of risk.

There are many safe investments, but as the saying goes, “no pain, no profit.” The reward for “pain” is 10% and a return you could enjoy.