Even though your cousin with the skeptical business practices might try to tell you differently, there is no such thing as a “sure thing” when it comes to investments.
Sure, some investments might not have as much risk as others — a bank CD essentially guarantees at least some return, for example, while a startup tech company could fold in less than a year and take all of your money with it. There is never a guarantee that you will earn as much as you expect from an investment or that you won’t lose money, though.
The element of risk in investing is why most financial advisers recommend a diversified portfolio comprised of several different types of investments, with the idea being that those that have historically seen consistent returns will offset the higher risk investments. Conventional wisdom also holds that some people can afford to take on more risk, especially in retirement plans. After all, someone who has 30 or 40 years to go before retirement can afford to lose a bit more of his or her nest egg than someone with only a few working years can.
Many people begin their investment journey conservatively, often out of an abundance of caution. That’s not a bad move, either. Until you have a better understanding of the markets and how to manage your money, it’s best to proceed cautiously. However, there are times when taking your investments to the next level is a better strategy, and taking on more risk is the better move. And usually, there are some very clear signs that it’s time to take on more risk.
You Can Afford It
One of the basic principles of investing is to never invest more than you can afford to lose. However, as your income increases and you build wealth, you may be able to afford to allocate more money toward your investments.
In most cases, should the gamble not pay off, the losses won’t be devastating and you’ll bounce back. However, should the risky investment actually perform at or above expectations, you’ll only increase your wealth — and your ability to invest more going forward.
You Have a Short Term Goal in Mind
Younger investors usually view their portfolio as a marathon, not a sprint, and steadily work toward their goals. Sometimes, though, you have a shorter-term goal in mind. It might be to earn a certain amount of money on a particular trend, or to hold on to a stock until it reaches a certain point. Or it might simply be that you only have a few years left before retirement and you want to “catch up” to ensure you have enough money to cover your expenses. If you can afford to lose some of your money, then making a riskier investment for a shorter period can pay off.
Trends Are in Your Favor
Every day, individual stocks go up or down. Fluctuations are natural, with prices usually going up or down a few dollars at a time. However, the smart investor doesn’t make decisions based on daily fluctuations, but instead looks at the stock’s performance over time. Using tools like those available on trendsinvesting.com, you can monitor a stock trend. A particular stock might gain $10 one day, and lose $4 the next —followed by a gain of $6. Over time, when the gains are consistently larger than the losses, that indicates a positive trend — and that the investment is likely a solid one. Likewise, if the trend is in a downward direction, it may not be a safe investment.
In terms of risk, when you are monitoring a stock’s performance over time before making an investment decision, the time to invest is when you start seeing an overall positive trend. A few “off” days aren’t necessarily cause for concern when the trajectory is upwards, and you can usually safely take more risk on this type of investment.
Investing in the stock market requires at least some type of risk tolerance. Risk avoidance is all but impossible, so you need to determine just how much risk you’re willing to withstand. As you grow more confident and realize some success in the markets, you’ll more confidently identify those situations that warrant a higher degree of risk — and most likely experience the rewards that come with doing so.