Understanding Risks in Investing

If you talk to the average person on the street about investing especially these days, you'll probably hear a lot of talk about why investing your money is so risky. You may be told that you should stay away from the stock market or real estate because there is a great chance that you'll end up losing all of your hard earned money in these difficult economic times.

These fears about investing have certainly been made worse given the economic downturn that the country (and much of the world) has experienced in the last few years. The troubles in the stock market, along with the precipitous drop in real estate prices, have led to more uncertainty as countless Americans struggle to overcome their financial difficulties.

As a result, many people believe that they should strive to avoid all kinds of risk when deciding where to put their money. This means staying away from the stock market and putting more money into bonds and other "safe" investments.

The problem with this approach is that people are assuming that they can eliminate the risks that exist out in the real world, which of course is not the case. In addition, we often forget that there is a strong connection between the risks we are willing to take and the rewards that may await us as a result. What this means is that if we are not willing to take any risk at all in our money decisions, then we have very little chance of growing our wealth over the long term.

As a matter of fact, sticking to bonds, money market funds, and other similar accounts will most likely translate into very low returns on investment. When you consider the threat of inflation, along with capital gains taxes, you may actually be losing money as a result of choosing so-called safe investments.

When we stop and look at life in general, we realize that it is probably impossible to eliminate risk completely, and even if we could we would probably end up with a lower quality of life. In the same way, trying to avoid all risks when making financial decisions will probably lead to mediocre results at best, and even these so-called safe investments are not infallible.

Our point is not that you should avoid lower risk investments and instead put all of your money into the most volatile financial accounts and investments you can find. We do believe, though, that you should diversify your investments and consider including assets like stocks and real estate in your long-term plans.

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