Managing risk in investing is crucial for beginner investors. What is an investment anyway????
An investment is a way of trying to use money to earn money.
For example, if you bought Humphrey the Beanie Baby in the 90s for $5, you might be able to sell it today for $500. That would be a great investment. If you buy a house, and rent out rooms in it for income – that is an investment. And even if you don’t rent out the rooms? If the house value appreciates over time, it’s still an investment.
You can also invest in companies. When you invest in a company’s stock, you’re buying a piece of that company. You could make money off of that investment by selling it for more than you paid originally. In some cases, you can even earn income before you sell it if the company you invest in pays dividends.
BUT…(you knew there was a ‘but’ coming didn’t you?) Most investments come with what’s called RISK. There are many different risks when it comes to investing, but one that people tend to worry about most is the risk of a given stock. That is, how much an investment is likely to move DOWN or UP over a period of time.
Why would someone choose a riskier investment? There is generally a relationship between risk and the potential for gains. As in, the riskier an investment is, the more likely the stock is going to up or down. So generally, while you are young and have a long time until retirement, you can afford to take a chance with riskier investments. And as you mature and get closer to retirement, you want to have reduced volatility in your portfolio.