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!!
An investment return before the rise of the Internet was little more than what the investment advisor on the other end of the phone had told you that you had made. However, now, investment returns can be easily checked online for absolutely free - and on top of that, the assessments made by investment advisors can be easily checked by the most novice of investors. It is always a good policy to use one of these free investment return calculators online to get a sense of the market rate for any investment in which you are planning to put your money.
Return on investment, or ROI, is almost always focused on financial returns that result from an investment. Returns are classified as tangible when there is a direct gain/loss or as intangible when the return is a soft gain/loss. This can be an investment like purchasing a stock or a home which increasing in value or pays a dividend or provides rental income. It can also be a business return on an investment in a new technology which produces revenue or cuts expenses.
The Sharpe Ratio is a financial benchmark used to judge how effectively an investment uses risk to get return. It's equal to (investment return - risk free return)/(standard deviation of investment returns). Standard deviation is used as a proxy for risk (but this inherently assumes that returns are normally distributed, which is not always the case). See the related link for an Excel spreadsheet that helps you calculate the Sharpe Ratio, and other limitations.
Maybe it is because of the uncertainty of the economy ( the ups and downs of the stock market)"How much importance should be given to the fact that (while the gains from the retirement of a loan can be estimated) (the returns from an investment always carry a risk?)"I sincerely apologize for getting technical with grammar but I would like to answer your question as accurately as possible. I bracketed the parts of your question because I'm not sure what you're actually asking. I will try to answer it in the two ways I can see it being asked.1) How does the retirement of a loan impact investment risk?The reduction of debt on the books of a corporation can positively impact its financial strength, thereby potentially reducing some of the risk involved in investing in that company. However, any investment, including a savings account, will always carry some element of risk.(With a savings account you can carry "opportunity" risk. By not investing in the bond or stock markets, or anything other than a savings account, you lose out on the opportunity to earn higher returns.)2) How much importance should be given to the fact that the returns from an investment always carry a risk, regardless of potentially positive factors affecting a companies balance sheet?Simply put, risk is one of the most, if not (arguably) THE most, important factors in evaluating a stock to purchase into, or sell out of, your portfolio.Through careful analysis and/or just listening to the consensus opinions of stock researchers, it's plain to see how much risk a stock has relative to the market and stocks in its peer group.What is much harder to evaluate, and what can only be answered by you, is how much risk is appropriate for YOU. There are plenty of online resources to help you determine that for yourself. Or you can seek out the help of a qualified financial professional.. Again I'm sorry for being picky with grammar. Good Luck!!
The level of importance depends completely on how much you need the money you are talking about for some other use. If you have a pool of money to either pay back debt (risk-free) or invest in a money making project (risky) the importance is how you would feel if you could not pay back the debt if you lose 100% of your money. If you would feel real bad about losing it, then it is real important, if you can afford to lose it and can make your debt payments some other way that is risk-free then not very important. Should this "feeling" be decided before you do something with the money? You betcha!
Long term studies on the performance of investment newsletters have shown that it is exceedingly difficult over the long term to consistently outperform a broad based market index such as the Standard & Poor's 500. In addition, comparing the returns of investment newsletters to the overall market is a complex task since many investment newsletters are not fully invested in stocks 100 per cent of the time. As a result, the returns of investment newsletters have to be expressed as "risk adjusted returns" (depending upon how much of an investment newsletter portfolio is allocated to cash) which clouds the comparison to a portfolio always 100 per cent invested in stocks. Theoretically a portfolio not fully invested in stocks should have less volatility and therefore less risk but not being fully invested during a bull market results in the risk that an investor will under perform the market. Studies by the Hulbert Financial Digest, which has been monitoring investment newsletters for two decades shows that some stock advisors have great track records but very few can consistently outperform the overall returns of the stock market. The best investment strategy for most investors would be to take the advice of Warren Buffett and invest in a low cost S&P 500 index fund such as the one run by Vanguard Group.
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