Investing can be confusing and intimidating, and doing your due diligence before investing is more difficult than it seems. How do you balance risk and reward and find the best way to grow your money?
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Here are five truths about risk-reward investing that will help you invest with more confidence.
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Volatility is not the same as risk
One of the biggest myths about investing is that volatility equals risk, but this is not true as market fluctuations due to external factors should be expected.
“People often think that when the market is bouncing up and down, their entire financial future is on shaky ground,” said Tyler Meyer, CFP and founder of Retire to Abundance. “But the truth is that volatility is just a measure of short-term price fluctuations – it does not necessarily reflect the true risk of losing your capital.”
Meyer noted that the real risk comes from continually losing money and failing to keep up with inflation. However, you should expect volatility to occur, which is not as dangerous as you might think.
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You can reduce your risks with proper diversification
“By spreading your investments across different assets, sectors and geographies, you reduce the likelihood that one setback will bring down your entire portfolio,” Meyer said. “With proper diversification, even if one or two investments don’t perform well, the rest of your portfolio can soften the blow and keep your overall wealth intact.”
In other words, putting all your money into one investment is very risky: you can make a big profit if the investment turns out well, but if it turns out bad, you could lose everything. This risk is reduced by diversifying your investments across different assets and asset types. You may see a smaller reward if that investment goes through the roof and you don’t go all in, but you should still see overall growth if you’re properly diversified.
Anyone can access the rewards
These days, anyone can start investing and reap the rewards without having significant capital or any financial background.
“One of the common misconceptions about investing is that it is only for the rich,” says Uziel Gomez, financial planner and founder of Primeros Financial. “While this may have been true in the past, today there are many platforms that allow anyone to start investing with as little as $5.”
Many platforms offer fractional shares, so you can invest in a company even if you can’t afford the shares, as well as robo-advisory services that can effectively manage your portfolio, meaning you don’t have to spend money on hiring employees. professional financial planner.
Investing is not gambling
Another common myth about investing is that it is a game of chance and you could lose all your money. While there will always be risks associated with investing and you may lose money on a bad investment, it is not a gamble if you invest wisely.
Gomez said: “While the stock market does fluctuate and has inherent risks, investing involves much more than chance. It requires research, strategic planning and thoughtful decision making—as opposed to the experience of going to a casino and betting on a certain color.”
If you’re worried about investing because you don’t want to take on risks for rewards, you can always start with an index fund that has diversification built in to protect your capital.
Rewards are an important tool for creating wealth.
“The surest way to create true long-term wealth and grow your net worth is to invest in the stock market,” said Robert R. Johnson, Ph.D., professor of finance at Creighton University’s Heider College of Business. “Starting early is the key to successful wealth accumulation due to the effect of compound interest.”
While frugality and finding ways to save money will be extremely helpful on your financial journey, you can’t just focus on saving if the goal is to accumulate wealth. You will have to invest and take risks if you want to reap meaningful rewards.
Johnson added: “The truth is that the stock market is a positive-sum game and is designed for people to win. They just need time and patience and discipline. It’s actually an easy game to win.”
It is worth noting that risks when investing money can often pay off. You also don’t have to invest in the stock market if you want your money to grow – there are plenty of ways to grow your capital, from buying property to starting a business. Find a way to invest your money where you feel comfortable taking risks for potential rewards.
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This article originally appeared on GOBankingRates.com: The Truth About Investment Risks and Rewards.
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