Risk is a very important part of investing. You can’t escape it. You have to keep in mind the risks you are taking when you invest in anything. You never know what could happen when you invest. You could make a lot of money or you could lose a lot of money. The more risk you have, the more likely you’ll lose money. You need to focus on minimizing risk.
Let’s look at how different investments carry different amounts of risk. You want to invest $10,000 and have two different friends looking for money for their new businesses. The first friend has borrowed money from you before and always paid you back. You are pretty sure they’ll pay you back this time, there fore you have low risk.
The other friend also has an idea but is bad with loans. They have bad credit and never pay you back. They think their idea is great, but you can’t be very sure they’ll pay you back. They have failed in other businesses and didn’t repay those loans which is why their credit is so bad.
The second friend is very risky, but to you, their business idea sounds incredible. You could see it making a lot of money and you’re friend promises that you can share half of the profits. On the other hand, your first friend has a pretty ordinary idea and they promise they’ll pay you back with 8% interest.
You have a lot more risk in the second friend, but you will make a lot more money with them. You have almost no risk with the first friend, but you’re only going to make 8%, no matter how well the business does. You have to decide if you are willing to take the risk on more profit.
The difference between stocks and bonds is very similar. Put your money in a stock mutual fund that is high risk and you could make a lot of money, but you might not. Invest in a bond fund and you will probably make a meager return.
A bond mutual fund is better for conservative investors who are nearing retirement. They don’t want to risk too much money because they know they will need to rely on that money in the near future. Bonds are a better bet because they are much less risky and less likely to lose money.
While your young, invest more in stocks. As you get older you can invest more and more in conservative bonds. This method will allow you to make the most without worrying about losing it.
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