What is your appetite for risk?
Movies like The Wolf of Wall Street show us the good, the bad and the plain ugly sides of investing. With Jordan Belfort (Leonardo DiCaprio) fuelling a life of excess that collapsed due to his radical stock broking. While the characters in movies such as this may talk finance and seem to make a lot of money, we don't really get a good idea of what investing is about and who it is for. Yes, investing is about taking risks and getting rich, but it most certainly is not about being ridiculous.
Many investors will make a lot of money – but not a lot will maintain this over time. There will be ups and there will be downs, but the secret to sustaining success is being patient and pragmatic. Investments inherently grow over time, some faster than others and some more more safely than others. As we have learned from the movies, when you take great risks, sometimes there aren't any returns.
While it may seem a scary game to play, it doesn't have to be. It all depends on your appetite for risk. So let's have a look at what this really means.
Does risk nauseate you?
We know that parents put down college funds for their kids when they are still at a young age. But why do they decide to start this early?
Most of the time, a college fund will be a high-interest term account, which have almost two decades to mature. The wonder of compound interest means that by putting in a little bit early, you'll get a lot out of it later. Take, for instance, a parent who puts away $5,000 for 18 years at a modest interest rate of only 6 per cent. Even if they don't make any deposits at all over that period, once they go to withdraw the funds, it will have exceeded $14,000. For something like this – it just makes sense. However, what if they only started with $1,000 but put $100 dollars away a month? After 18 years, they'd have more than $41,000.
Albert Einstein called compound interest "the greatest invention of mankind."
Are you hungry for risk?
Albert Einstein called compound interest "the greatest invention of mankind." When we look at examples like the former, it's easy to see the attraction of financial investment in savings accounts. Even so, these are low risk investments with a low rate of return to match. Investing in other categories can offer much higher rates of return, but with this will always come with greater levels of uncertainty. For instance, you could invest $5,000 into a startup company. With major growth forecast, the startup could offer a rate of returns up to 30 per cent. After only five years, your investment would almost have quadrupled its value. Then if you did the same again with four new companies and so on, you could be looking at having almost $1 million within 18 years. However, any of these companies could also fail dismally, meaning that all of your money could be lost – even your initial investment.
Finding your investment diet
Financial planning is not simple, as there is a lot to get your head around and a lot of other categories to invest in. Whenever putting up a lot of money – especially when you are new to investment – it helps to be pointed in the right direction and to know what will suit your appetite for risk. There are so many options to consider when investing, so ultimately it's not about making a right or wrong decision, it's about figuring out what aligns with your situation and personality.
For advice about what investments could work for you, get in touch with Eclipse Financial Services today.