Investing: how much risk are you willing to take?

When investing your hard earned money, the main thing you don’t want is to see it all reduced to nothing a few months or a few years later. The general wisdom is that, the higher the risk, the higher the returns. For a super safe return, you can place your savings into a savings account, with a little planning, some of these earnings can even be tax free. Such is the case of Investment Savings Accounts (ISAs) in the UK, up to a yearly threshold. But what can you expect for a risk-free investment? In these markets, about 1 or 2% a year, barely enough to keep up with inflation.

The next safest investment are probably bonds. Issued by the state or some big companies, bonds are like a loan, and you will get your money back, plus interest, at the end of a term, generally a few years. Because you can’t touch the money, you better not have an emergency, or you stand to lose part or all of the accrued interest. All that trouble for 2-5% a year. But then again, you are almost guaranteed to see your money back.

Then comes stock and shares trading. If you invest regularly, over the long term, you should see a positive return on index funds, which are a mix of several important companies. But you have to be ready to stomach the market’s crisis and dips, and able to wait long enough for the returns to be worth your while. If you invest only in one company, and that company goes south, you stand to lose all your money. And more if you traded on margin. But with a balanced mix of index funds, you should be pretty safe over the course of a decade or two.

Next, I would place real estate investments. A normal return on a property these days is around 5%, with some locations allowing you to get returns in the low double digits. Bye bye passive investments. You will need to find tenants, upkeep the place, charge rent, face vacancies, and more. But in general terms, getting a buy to let mortgage allows you to leverage your downpayment, get the property mostly paid by your tenants, and at the end of the mortgage, keep the full rent to yourself. You also can make a profit by selling the property later on, if your neighborhood went up. Again, this is likely over the course of 20 or 30 years, but not guaranteed in the short term.

Last comes active trading. You can day trade stocks and shares, or foreign currency pairs, and even binary options. Binary options offer you the opportunity to trade over short amounts of time, and if you do your research properly, you can make quite good money out of it. Check out the Banc De Binary blog to learn more about binary options. It goes as follow: you place a bet on a currency pair, or another asset, and define the outcome you think it will have, go up or down, over the course of a set term. If the trade goes your way, your trading platform gives you a profit. If it goes against you, you lose your money. As you can see, the greater the risk, the greater the reward.

So to be safe, diversify your portfolio across these investments, and don’t put all your eggs in the same basket. Even if you only pick one investment vehicle, try to diversify within it.