Before you invest, it's important to consider both your risk tolerance and your risk capacity. Risk tolerance is your willingness to take on risk. Risk capacity is how much risk you can afford to take on given your financial situation. Both are equally important.
Most people are risk-averse. That means, with everything else the same, they would prefer less to more risk. It also means that they would prefer the highest expected return available for a given level or risk. It makes sense then that any investor would take on additional risk because they expect to earn a higher rate of return on that investment.
Think of it like this...there is a range of investment options available to you. The low risk option has a low rate of return but almost no risk, like a savings account or a certificate of deposit. For your parents, it might be sercurities issued and guaranteed by the U.S. government like a Treasury bill, note or bond. If you select this option you can expect to earn a low rate of return but the investment is not risky. Or in other words, your actual rate of return will be very close to the return that you expect.
The high risk option has a high rate of expected return but carries potentially a lot of risk. To select this option, you would need to be both willing and able to take on the risk associated with the investment. Potentially, you would need to be both willing and able to lose your investment.
Read more about risk and return at FINRA's Investing Strategies web site.
No comments:
Post a Comment