Financial Concept: Risk vs. Return

No discussion of investments can take place without an understanding of the fundamental concept of Risk. Investments that are high risk can provide a high reward . . . or may end up losing much of their value. An aggressive, risk-loving investor who doesn’t need the money in the near term may invest in riskier, more volatile assets. This approach is appropriate for someone with high earning potential who doesn’t expect to need the cash soon, for example, to purchase a house.

Risk Tolerance is your individual willingness to lose some or all of your investment capital in exchange for larger potential returns. An investor closer to retirement age probably has a lower tolerance for risk than the high wage-earner, and will likely favor a conservative investment approach to preserve capital. For this investor, a lower-risk portfolio that produces more modest returns is appropriate as it doesn’t expose the investment to the risk of losing value just when he is ready to retire.

Each investment strategy, however, also needs to be weighed relative to the tax implications of the investment. A high wage-earner may be in a high tax bracket, which means that his capital gains will be more heavily taxed than those of someone in a lower tax bracket. Make sure your investment advisor is knowledgeable both about a range of investment strategies and their tax consequences to help you keep as much as possible of what you gain.