In the eyes of an investor of any experience – amateur or expert, the two most important factors to consider when choosing investments are risk and return. At some point, one will become more important than the other. If you want to increase your rewards, you have to expect that more risk will accompany it. If you want to lower your exposure to risk, then you can expect the value of returns will drop accordingly.
Your investing goals will determine the return you need to receive, in order to achieve your financial milestones. In turn, this will put a limit on the risk you are permitted to introduce to your investment portfolio. In either case, your affinity for risk and return will dictate the fundamentals of your investing strategy. In doing so, it will heavily influence your decision to invest or not.
Whenever you are assessing risk, it is important to think about the worst-case scenario. If it’s something you cannot tolerate, then it likely does not fall into your investing plan and will not help you meet your investment goals. It should be immediately dismissed if it will not advance your financial position. For example, approximately 46 percent of investors feel that the stock market is overvalued. Could your portfolio survive a market correction? If not, then stock investments should definitely be avoided.
When choosing investments, expect that every opportunity will be subject to heavy scrutiny. Be prepared to weigh the benefits of investing opportunities on an individual basis, based on your personal risk tolerance and hunger for returns. These two principles will guide your decisions and give you the confidence you need to make an investment.