Whenever you invest money, there is a large or small risk that you might not get your money back. The higher the risk is, the more you should receive for holding the investment, and the lower the risk is, the less your returns are. However, you should first know the way of determining risk your individual portfolio should bear, before choosing between high returns and low risks.
Before you make any investment, you should always be aware of the period of time at your disposal to keep your money invested. Higher-risk stocks are not the best strategy to use if you will need your investment for other purposes in a year. The riskier the investment is, the greater it's the volatility or price fluctuations; thus, you should mind about the future of your investment. You can loose a lot, when withdrawing your money earlier. When you sell your securities in emergency, it ends in a significant loss.
The longer is the period you are ready not to address your cash, the higher you are tolerant to risks and the higher returns you can get. A ten year period is more convenient to invest in higher-risk stocks, as there will be more time, available to recover any possible losses. The ten-year period will more likely make your assets and returns sustainable as soon as you will not be forced to sell out the bonds, when you d not want to sell them.
It would be also great if you know the amount of money you can afford yourself to loose, when counting risk possibilities. Your risk tolerance totally depends on your assets possibilities. The sum you can afford to loose is the way to avoid panic and liquidity issues, when you know that the money you invested is nothing more, but a working capital. If it does not work now, there is a certain hope it will in the nearest future. The need to sell them immediately disappears, you are protected from losses.
When having determined the risk of yours, you should come to an investment Risk Pyramid you should build before investing. A risk pyramid approach is a must to balance your assets. A risk pyramid is an asset allocation tool to diversify your portfolio investments according to the risk profile of each security. The pyramid of every investor has three distinct levels.
The foundation of the pyramid should be comprised of investments that are low in risk and have foreseeable returns. Remember that the foundation is the largest area, composing the bulk of your assets. A middle part of the risk pyramid consists of medium-risk investments, promising a stable return, while still allowing for a capital appreciation. Medium risk investments are still risky, but relatively safe. The top of the risk pyramid reveal the highest-risk investments. Therefore, this is the smallest area of your portfolio. It should be made up of money you can lose without a serious damage to your overall asset portfolio. As it has been mentioned above, it would be nice to have a possibility not to sell these assets in an urgent way to avoid losses. High-risk investments will earn their supposed return sooner or later; you only should have an ability to wait as long as needed.
The latest and the most important statement should remind you about the diversification of your portfolio. The diversification leads to the perfection of the investment pyramid. Only when paying proper attention to the diversification in alliance with every factor mentioned above, you will reach the top of success in managing your money.