Determine Your Own Personal Attitude Towards Risk

07/14/2014 6:00 am EST

Focus: FOREX

In this article, the staff at FXEmpire.com outlines the pluses and minuses of the different financial markets and stresses the importance of risk assessment.

The financial markets offer everyone routes to building personal net wealth—and losing it too, if they make bad decisions. At the heart of every financial decision, lies an assessment of risk—and your own personal appetite for taking on risk. Simply put, riskier financial products and schemes may bring you higher potential rewards—but also, usually, greater potential losses.

Compare this to low risk products which may be safer in terms of guaranteed returns—but these returns will generally be substantially lower. You can learn more about the different types of risk online, following academic models based on years of market behavior studies.

Let’s look at some examples of how you might choose to invest your money, depending on your attitudes to risk.

Savings

When you put money into a regular savings product, such as one offered by a high street bank, you will have the peace of mind in knowing that your money is safe (at least up to a maximum per financial institution), but the interest rate you receive will be correspondingly low. Bonds are a slightly higher risk product, which many investors choose to build into their portfolio.

Government bonds are the lowest risk, and retail, commercial, or generally private sector bonds will be higher risk—with returns priced in accordingly. Savings accounts are not perceived to be investments in the strict term, but rather savings products.

Stock Market Investments

The stock market can be high, medium, or low risk depending on how an individual structures his or her portfolio. For example, cherry picking individual company share purchases can be high risk, whereas having a balanced portfolio of low cost index funds, bonds, equities in large blue chips and some funds may be a lower risk. Similarly, emerging market investments may be seen to be higher risk—but emerging markets generally have higher potential for gains in the longer-term, if growth predictions pan out.

Forex Markets

The foreign currency or forex markets have long been popular with day traders who have high appetites for risk, and who thrive off the potential to make big money on sharp decisions. Many day traders lose money, but some manage to obtain attractive rewards; primarily those who work according to a pre-defined personal strategy and who take the time to educate themselves on how the markets work. The forex markets are fast paced, open all day and all year round, and allow individuals to play the markets as they wish. The Internet also makes Forex trading far easier—an individual can make immediate trades using trading software, using a variety of digital devices to access the broker’s forex trading platform. 

Deciding where you stand with regards to risk and your desired returns will help you to construct the right portfolio for your needs, and ensure that it performs accordingly over the longer-term. A financial advisor can help you to assess your own appetite for risk, your investment time scales, and your overall objectives, to help you to build the right portfolio for your individual needs.

By the Staff at FXEmpire.com

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