Understanding risk when you are investing

Every investor must understand that risk is basic part of investing. There is no investment that is totally risk free. Every investor must come to accept that risk is part of investing, or you may never be able to really accomplish your financial goals. However, it should be noted that not all risk is bad. While risk that is excessive is dangerous, if it were possible to eliminate all it would not be good or even possible. The bottom line is that a tolerance for risk is what brings about economic growth. Risk will always be a part of the system. Savvy investors realize that no matter how much research and preparation the do before investing, there is no guaranteed good outcome, and a negative outcome is always possible.

If the market became intolerant to risk, then it would require that there were huge returns on investments and debt would have an even higher interest rate. If this were to happen then financial experts predict that there would be very few new businesses being started, very little funding of research and development and most projects and business development would fade away. The bottom line is that because of the lack of risk, growth would be priced out of the economy. Statistics and sound economic principles show that risk more often leads to economic growth, then to failure.

It should be noted that risk and recklessness are not the same thing. Investors must determine what level of risk they are willing to accept without being reckless. In Other words each individual investor must be prudent, but still be able to take on some risk, in their investments. Because of the close nature of risk and investing it is important to be aware of certain factors. Here is what you should know about understanding risk when you are investing-

Risk and reward are tied together-There simply is not reward in the investing world without taking on some amount of risk. Investors must be able to decide how much risk they want, in correlation with the potential reward. It is important to note that this level of acceptable risk will not be the same for every person. Each person's level of risk that they are willing to accept will be based on:

1. The investor's personal needs
2. The investor's financial goals
3. The investor's overall psychological makeup

Most often those investors, who have been willing to make the time and effort to learn about the world of investing, are the ones who can successfully find their acceptable level of risk.

Investors should take all factors into consideration when choosing investments. Risk is only one part of the equation for successful investing. Those who are willing to take risk in their investments should also use common sense and restraint when determining what to invest in. Anyone who is acting on behalf of an investor should also take all factors into consideration such as:

1. The person's level of acceptable risk
2. The knowledge of the investment
3. The circumstances of the investment
4. The investor's personal financial goals.

Because risk is such an integral part of market growth, those who are willing to assume risk, should not punished as long as they are acting with prudence.

Investors should balance out investments with the risk they are willing to assume. While it can be exciting to think of taking on extreme risk, for extreme reward, savvy investors understand the need for balance and diversification. Few investors are in the position to safely have all investments at a high risk level. Every investor would do well to consider placing investments at all levels of risk, to insure different streams of income, all with different levels of risk.