March 27th, 2009 | by admin |
by Samantha A. Bow
Risk is a very important part of investing. You can’t escape it. You have to keep in mind the risks you are taking when you invest in anything. You never know what could happen when you invest. You could make a lot of money or you could lose a lot of money. The more risk you have, the more likely you’ll lose money. You need to focus on minimizing risk and that where bonds and fixed income investing comes in.
Let’s look at how different investments carry different amounts of risk. You want to invest $10,000 and have two different friends looking for money for their new businesses. The first friend has borrowed money from you before and always paid you back. You are pretty sure they’ll pay you back this time, there fore you have low risk.
Your other friend also needs $10,000 for this new idea they have. They are really excited because they feel they can earn a lot of money. Unfortunately, they almost never pay you back when they borrow yours or anyone else’s money. You don’t feel very well giving your money to them.
The first friend will most likely pay you back, but when they do, their only going to pay back with 8% interest. The second friend has a much better idea that you think will be a hit and he promises to give you half of the profits.
You have a lot more risk in the second friend, but you will make a lot more money with them. You have almost no risk with the first friend, but you’re only going to make 8%, no matter how well the business does. You have to decide if you are willing to take the risk on more profit.
The same goes with stocks and bonds. Stocks are more risky, but you could earn a lot more. Bonds are less likely to earn more money, but you’ll at least get back what you put in. The same goes with stock and bond mutual funds.
Investing in bonds mutual funds is better for conservative investors who are nearing retirement. They don’t want to risk too much money because they know they will need to rely on that money in the near future. Bonds are a better bet because they are much less risky and less likely to lose money.
While your young, invest more in stocks. As you get older you can invest more and more in conservative bonds. This method will allow you to make the most without worrying about losing it.
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Tags: bonds, business, family, finance, financial planning, home, investing, investment, Mutual Funds, stocks