Risk Assessment vs. Risk Return

 

When we hear the word RISK we will typically think of something that is adverse to what we want. Risk is thought of as a bad thing or a detriment to our goals. This is not necessarily true when it comes to our investment and savings processes. Risk - in its most pure form - is really just the level of uncertainty that you are willing to accept in pursuit of a potential return.

 

What level of risk are you ok with?

When considering different saving and investment vehicles you need to determine the level of risk associated with each. Always remember that the potential return is correlated with the level of risk involved with the product. A low level of risk means that your potential return will most likely be lower. If something is offering a high rate of return, the risk is probably higher. 

Always remember that there will always be a trade-off between risk and return.  Be very careful of a saving or investment opportunity that is offering a high rate of return with low risk, or a low rate of return with high risk. 

 

Assessment

For each and every saving and investment decision you need to assess your risk tolerance. Do you need the money in 6 months or 60 years? is this money meant to be liquid or can it be locked up for a while?  What is your personal level of comfort with taking on risk? if this money were to lose 20 percent in a few months are you ok with that or will it cost you sleepless nights?  These are all questions you need to be able to answer so that your risk tolerance is in line with you your saving and investment philosophy.

 

Learning Checkpoint:

Optional Activity: Check out the Risk vs Return TradeoffLinks to an external site. page from Investopedia.