Risk and Reward
What is too safe? What is too risky?
Investing can be an exciting and potentially rewarding activity especially as your wealth grows, but it's important to remember that there are always risks involved. Whether you're making a new investment or assessing a current one, fully evaluating the risks and rewards is crucial for making informed decisions and protecting your wealth.
The first step in weighing risks and rewards is to understand the different types of investments available. Some common examples include stocks, bonds, real estate, private equity/venture capital, precious metals and cryptocurrencies. Each type of investment carries its own level of risk and potential reward, so it's important to do your research and understand what you're getting into before making any investment decisions.
Once you've identified potential investment opportunities, it's crucial to evaluate the risks and rewards of each. Start by assessing the potential returns. What kind of return can you realistically expect to see on your investment and is this investment even worth it considering safer alternatives? What are the many different types of risks involved in this investment? Ask members of your trusted group for their opinions on the inherent risks of such an investment. Are there any hidden risks that you have yet to evaluate? Are the potential rewards worth these risks? Remember, higher expected returns often come with higher risk.
Next, consider the level of risk involved. How likely is it that you'll lose some or all of your investment? Are there any factors that could cause the investment to fail, such as changes in the economy, regulatory/political environment, interest rate sensitivity or industry-specific challenges? Additionally, you should always check the background of the people involved in the investment for any unsavory characters. Is there a fraud risk? If the investment opportunity is too good to be true, it could be a red flag for a potential fraud. Use your trusted peers to help you suss out as many of the risks as possible. Many minds are more valuable than one. Understanding the risks can help you make informed decisions and avoid investments that may not be worth it later on.
It's also important to consider your own risk tolerance. Some investors are comfortable taking on high levels of risk in pursuit of potential high returns, while others prefer to play it safe with lower-risk investments. Understanding your own risk tolerance can help you make investment decisions that align with your financial goals and comfort level.
In addition to weighing risks and rewards, it's important to diversify your investments. Spreading your money across a variety of investments can help minimize risk and maximize potential returns. For example, investing in a mix of stocks, bonds, private equity and real estate can provide a more balanced investment portfolio that can weather fluctuations in the economy. Sizing your investments appropriately will also help reduce the overall risk in your entire investment portfolio. A good rule of thumb is: If you stay awake at night thinking about the potential loss on your investment, it’s probably sized too large.
Finally, don't forget to regularly evaluate your investments and overall portfolio and make adjustments as needed. The economy and world are constantly changing and what may have been a good investment yesterday may not be a good investment today or in the future. Keep track of your investments and be prepared to make changes as needed to protect your financial future. Obviously, certain illiquid investments such as private equity, cannot be reevaluated and resized later. Thus, it’s important to get these investments right by understanding as many of the risks as possible before you make the investment.
In summary, weighing risks and rewards is a critical component of successful investing. By understanding the potential risks and rewards of each investment opportunity, getting feedback from your trusted peers, evaluating your own risk tolerance, diversifying your investments and regularly monitoring and adjusting your portfolio, you can make informed investment decisions that align with your financial goals and protect your wealth.
Enjoy and be safe.