Risk & return
While investing carries one type of risk and saving
another, your choice as an investor isn't simply between
losing money and losing value. Rather, if you understand the relationship
between risk and return, you'll be in a better position to
achieve your financial goals while holding onto enough of your
capital to live comfortably.
Pain for gain
If risk is the possibility of losing money, return is gain, or
what you get back over and above what you invest. And the cardinal
rule of investing is that the more risk you take, the greater
the possibility of a larger return. The catch is that you realize
the return only if the risk pays off.
For example, if you invest all your money in shares of a new company
that becomes a market leader, you could make a substantial amount
of money. But if the company fails, as many new companies do,
you could end up with nothing.
Suppose, instead, you invest 10% of your principal in that new
company. If it succeeds, you'll have money you didn't
have before to invest in another venture. And even if the company
fails, you still have 90% of what you began with to invest in
other ways.
The bottom line
With 10% of your portfolio in high risk investments, you might
invest another portion in the least risky investments with the
smallest return, and the balance in investments that fall between
those extremes.
|
Thomas J. Dorsey, President and
co-founder of Dorsey, Wright &
Associates 
