Investing 101

Lesson 2: Risk vs. Reward

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Risk vs. Reward

In investing, risk and reward go hand in hand. That’s because investments that have the potential to return a lot are generally riskier, and safer investments typically don’t return much.

Types of investments in order of risk

Finding the right balance

The takeaway isn’t that you should avoid risk. As we explained in the previous lesson, keeping your money in the bank or somewhere else super safe probably won’t get you where you need to go.

Instead, you want to invest according to the level of risk that’s right for you. That’s called your “risk tolerance” and is based on the following:

  • Investment timeline: The longer you have before you need to access your money, the more risk you can take on.
  • Risk appetite: How comfortable are you with risk? If your investments tumbled, would you panic and sell, or would you be able to hold on?

Based on those two factors, here’s a rough approximation of your risk tolerance:

Risk tolerance

Now you can figure out which types of investments fit you. Though we’ll dive into that more in the next lesson, here’s a preview:

Venture Capital Stock Options, Real Estate Individual Stocks, Index / Mutual Funds, Municipal Bonds, Secured Corporate Bonds, US Treasury Bonds, Certificate of Deposit, Savings Account, Checking Account, Cash, Styles of Investing