Investments have long been a way for people to provide for their future. The desire to save something for a rainy day is something that is taught to everyone from a young age. However, investments can be a tricky thing to figure out, especially because world events can cause such volatility in them.
In general, an ideal investment portfolio will be shaped like a pyramid, with a varying amount of risk to each investment. At the bottom will be the largest pool of investments, all of them low risk. In the middle, there is a smaller pool of medium risk investments, and at the tip of the pyramid, a few carefully chosen high-risk investments.
Knowing what type of investments make up your high, medium, and low-risk investments is key. Here are a few examples of each:
An example of a high-risk investment is a new biotechnology stock. Stocks like these from companies that market new drugs are extremely risky. That is because nearly 85 and 90 percent of them fail. And when they fail, they fail spectacularly, usually losing up to 95 percent of their original value.
Another type of investment that has long been considered high-risk is currency trading. That’s because there are so many factors that can move a particular currency. And currencies tend to remain relatively stable against each other, so making a profit relies on quick trading as the market fluctuates.
One exception to this is the relatively new rash of cryptocurrencies that are becoming investment opportunities. Companies such as Genesis Mining can make investing in Bitcoin or Ethereum a viable investment risk. Returns over the past 5-year span have been extremely lucrative, so younger investors might consider including them in their investment portfolio.
These investments include real estate, mutual funds, and some riskier bonds. The reason these are considered higher risk is because of the volatility of the market. Real estate will always increase in value given a long enough time line. However, in the short term, the real estate market can fluctuate wildly. One only has to look at the housing bubble of the early 21st century to realize that.
Most people consider mutual funds to be a medium risk investment; again, it is because of their potential to lose value in the short term. This is especially true if the fund is investing in higher risk bonds. While debt bonds are usually a moderately safe bet, they can fail if the company issuing the bond doesn’t recover and is forced to file bankruptcy.
A classic low-risk investment is the standard EE-series United States Savings Bond. These bonds are highly unlikely to fail, simply because they have the backing of the United States Treasury. For them to fail to perform would mean that the United States was in financial trouble, which has rarely happened.
Another low-risk investment are CDs and Money Market accounts. These offer a low return but are considered a very stable investment and offer steady long-term growth. Cash is also a low-risk investment, although it can be riskier, especially in times of high inflation. The Turkish Lira is a prime example of how inflation can devalue currency quickly.
Another thing to keep in mind when you’re investing is to consider how long your investments have to recover from a high risk investment failing. For example, if you’re in your early 20s, your retirement portfolio will have time to recover, so investing more in high-risk options may allow you some quick growth. On the other hand, if you are in your mid-30s, moving out of high-risk and concentrating on steady growth for your retirement is a great idea.
Investing takes research and planning to secure a retirement that affords you the opportunity to enjoy your twilight years. Knowing the proper percentage of risk in your investments is key to ensuring that happens.
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