Bigger Profits with Bigger Risks – Is it worth it?
In all investing there is an expected trade-off between risk and return. With a federally insured basic bank savings account it is nearly impossible to lose your money up to the insured limits and you can take your money without penalty any time, but will be lucky to get a 1% return. By agreeing to have your money tied up with a penalty for early removal you can get slightly higher returns with Certificates of Deposits and Government Bonds.As you seek higher returns a mutual fund is a consideration – it has far more potential than the previous mentioned but you also begin to have the real possibility of losing money instead of gaining.
This trade in risk and potential return is always there. Without the possibility of higher returns nobody would accept greater risk.
In a well balanced portfolio you have money spread across varying degrees of risk to provide a shield against losses on high return investments and against inflation on low return savings and bonds.
This balance is adjusted based on your age and goals which help determine your risk tolerance.
Inevitably, a person begins to consider higher risks for more profits. Nowhere is this more possible than in futures markets and Forex markets. In every level of investing up to standard stocks, you can lose money but the most you are risking is the amount invested. In the currency exchange and commodity markets you may choose to only take a position with $10,000 but it is possible to lose far more than that. Investing $10k and losing $15k (yes – they will send bill and collect for the additional) is very possible. Because of this, you cannot put all your money into a position- there must be enough in reserve to pay for potential other losses that arise from that position. It would be like going into a casino and playing blackjack with a $25 bet but when you lose the dealer takes your $25 bet from the table plus the rest of your money in your wallet.
So why would anybody ever consider it? Because when you win the bet you do not win just $25, you can also win $200 on with the same bet. With careful strategies to help mitigate the potential for that loss you can get a much higher return than otherwise available and see substantial growth in your portfolio. When choosing to look for these high returns you cannot use all of your risk capital. Use only a small portion of it and save the rest of your risk capital to insulate against potential losses greater than your investment amount. Placing 10% (which would seem like a reasonable risk capital portion of your portfolio) into high risk areas is actually risking as much as 50% of your total portfolio. To get a better idea of the risks and potential profits, try setting up a free demo account in the forex market with CMC Markets.