Investment involves a certain amount of risk. As a general rule, risk and return run together. The more risk you take; the greater return you chance to make. It’s basic business. The economic environment influences whether you should take risks. When the business environment is expanding, that’s the time to take advantage of this by taking greater risks. But when the business climate begins contracting and investment opportunities are less plentiful, this is the time to put your money in less risky investments.
In terms of risk, personal finance investments fall under several basic areas. These are:
Ø The first area revolves around investments, such as savings accounts, savings bonds, certificates of deposit (CDs), and money market. These are investments where your return is interest calculated off the amount of money you invest. There is a very low risk that you will lose your money on these types of investments. An article that will give you a good background into CDs is “Should I Invest in CDs?”
Ø The second area is investments having to do with real estate. This can be anything from buying a home, buying investment property, or investing in a Real Estate Investment Trust (REIT). Real estate can be costly and it ties your money up so that you can’t always get to it in times of emergency. A real estate purchase is often a method of forced savings. The risk in real estate is greater than the savings type investments in the first area, but the return is equally great. Over the long term, real estate prices have gone up. An excellent site for real estate information is www.zillow.com.
Ø The third area has to do with securities, which includes investments such as stocks, bonds, and futures. One of the ways you can invest in securities is to invest your money in a mutual fund. An article that addresses this is “A Mutual Fund Strategy: From the Top Down,” which is the featured article in the Personal Finance Center this week. Depending on which stocks you invest in your risk can be high, but so is your potential return. In the long term, stocks continue to rise, even with the occasional dips.
Ø The fourth area includes things such as art, antiques, coins, stamps, and other collectibles. These are usually tangible items that have a value that usually goes up gradually, but are sometimes subject to huge fluctuations. At the present time, art objects, such as paintings are selling at incredible prices, and items from the California Gold Rush are going up in value. Gold and silver coins are also usually good investments because the prices of gold and silver continue to rise, and both can be easily cashed out.
The idea when building your personal finance portfolio is to diversify your investments so that you have investments in each of these four areas. In times when area such real estate and securities are down and the risk the risk is great, this is the time to invest in the areas that are less risky.