How much importance should be given to the fact that returns from an investment always carry a risk attached to them?

Answer 1

Do you want the long answer or the short answer? The short answer is...alot. But with that short answer comes many caveats. Risk needs to be analyzed from a number of different perspectives. First of all, what does risk mean to you? Every person defines risk differently. How much is too much? How much is not enough? Second, risk needs to be defined in relation to the investment itself, the goal you have in mind (i.e. retirement, house down payment, HDTV, etc.), and how long before you want to reach that goal. When considering any investment, you need to analyze its risk relative to the risk found with similar investments. Not just mutual fund to mutual fund, but Large-Cap Growth mutual fund looking for high dividend payouts, for example, as compared to all other Large-Cap Growth mutual funds looking for high dividend payouts. Not just stock to stock but mid-sized health-care company specializing in the construction of medical equipment, for example, as compared to all other mid-sized health-care companies specializing in the construction of medical equipment. As mentioned, your goals and time frame will also impact your tolerance for risk. If you're saving money for a down payment on a house that you want to buy next spring, conventional wisdom would dictate that you don't place your cash into something that's even moderately risky. You would normally place that money in something that has little or no chance of losing value. Conversely, if you have 30 years before retirement and you want to invest for that eventuality, theoretically you could put your money into investments that may fluctuate in value quite a bit, but time tends to even out those fluctuations reducing the overall risk. There are alot of gaps in my answer. To fill them all would mean writing a book. The bottom line is that each person is different. The overall rule of thumb on risk is that there is no rule of thumb. The best advice I could give you would be to seek out the assistance of a knowledgeable professional. There are a wide range of choices available to you. If you would like someone to advise you in every facet of your finances, not just stocks, bonds, mutual finds, etc., but debt management, estate planning, insurance, banking, etc., the full service, fee-based advisors at places like Merrill Lynch, Smith Barney, and Morgan Stanley, do a fantastic job for a much more reasonable price than many expect. They are also no longer the product pushers of old. These firms have become very adept at helping their clients in a way their clients never thought possible. If you want some basic help on investments, want a lower fee in most cases, and are willing to pay alot of attention to your own accounts, the folks at places like Charles Schwab and Waterhouse, do really, really well. Plus they also have the products available to cover just about every financial need. Both will do a great job educating you and helping you establish an investment portfolio that is sensitive to YOUR risk tolerance. I suggest that if you have an existing investment portfolio, including a 401(k), that exceeds $250,000, and/or you make more than $100,000/year, your first stop should be the full service firms. They seem to be better suited to providing consultation to high net worth families and the complexity of issues they face. Once you've done that, I would still compare the others (Schwab and Waterhouse) because you may not need or want full service. In other words, you need to see what is the best fit for you. Of course you could always try going alone, in which case there are a number of web-based firms, like e-Trade and Ameritrade, that give you the platform to trade and the tools in which to educate yourself, plus they are very low-cost. Just remember, for the most part you're going it alone. If you're ok with that, give it a try! Hope this helps a little. Good Luck!!