Friday, May 11, 2012

How to Get Rich - Understand Your Risk

Everything in life involves some degree of risk. Every day you wake up it may be your last. Who knows, accidents happen when least expected.

The world of investing is no exception to this rule. Life is risky no matter what you do. Even by not investing you are taking a risk, yet most people don't even realize that.

The Risk of Doing Nothing

Let's say you are very good at saving but never invest the savings. Instead, because you don't trust banks, you stuff the savings in a mattress and sleep on it every night. This method of saving used to be quite common in the past. I am sure there are even still some that do this today.

Now think of the risks of doing this. For starters, you have to leave your savings unattended to earn more money. This leaves it open to theft if someone finds out about it, or what happens if your house burns down.
If either of these happened, you would lose everything. Not smart.

Another not so obvious risk is the loss of purchasing power. A dollar stuffed in the mattress back in say 1940 was worth far more than your dollar you stuffed in there yesterday. Your total stash decreases in value each and every day if you don't put it to work  The reason for this is called inflation, or the slowly decreasing loss of purchasing power on every dollar.

The Risk of Investing

All forms of investing has risk. Whether it be from loss of purchasing power as shown above ( not making enough to match inflation) or the potential for losing from the ups and downs of the stock market roller coaster or somewhere in between. Risk is everywhere.

You can even loose all of your investment if you blindly trust someone and that someone turns out to be a thief. There have been a few lately, no names mentioned. Berney Who ?

Understand Your Risk

The first lesson for every new investor should be the understanding of risk. You must realize that there is risk in everything you do, or don't do.

To know your risk you must understand as much as you can about an investment before investing. Know how to get out of something before you get in. If there is no way to exit, don't enter.

Remember, you will be investing your hard earned money and savings. You must become educated about all the risks associated with the choices you have.

As always, I welcome your comments and suggestions for future topics.

1 comment:

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