What would you like your money to do? Come on, tell the truth--wouldn't you like to earn a very high return in a short period of time, 100 percent guaranteed? For some people, investing is like being in a center-ring fight: They want to score a quick knockout punch. Like the boxer who trains only for the big fight, however, there's a very good chance that without proper coaching, you'll come up short. On the other hand, when Rocky fought hard against all odds, the crowds went wild. After all, the fight doesn't always go to the strong or the race to the quick--sometimes it's the tortoise that beats the hare. For every lucky winner, though, there are hundreds of disheartened souls mourning their hero's trip to the mat. When it comes to investing, the difference between winning and losing is about more than just luck--it includes an investor's willingness to assume risk.
What is risk? Risk is uncertainty, and in uncertainty can be opportunity. Without uncertainty, there's little chance for profit. But without some certainty, all you have is risk, and that's like entering a title bout without your boxing gloves. Although risk means different things to different people, how you deal with it can affect your ability to finance your children's education, buy the house of your dreams or retire comfortably. For most investors, understanding risk is as difficult as beating Mike Tyson would be for someone whose only boxing experience is watching "Raging Bull." Understanding your relationship to risk can help you maximize your returns, minimize your losses and reach your financial goals.
There are as many kinds of risk as there are punches. To some, risk is the chance of losing all or part of an investment. A choice between one investment that offers a return of 5 percent and another that offers 10 percent seems easy: Take the one that makes the most. The problems begin when risk pokes its head in and warns you that to achieve the higher return, all or part of the original investment could be lost.
But investing isn't a fight between two opposing champions. That's because smart investors diversify their holdings to decrease the chance of loss and increase their opportunity to make money. As you can imagine, investments with a very low risk factor probably won't make you rich. When you consider how the wealthy got that way, you'll probably find it's through real estate, business ventures, stock portfolios or even inheritances--but rarely is it through investing in CDs and T-bills. On the other hand, if you place some of your assets in secure investments, you probably won't get stuck with a black eye and nothing to show for it. Experts agree the best strategy may be to diversify your assets between high-, moderate- and low-risk investments to take advantage of all opportunities, much like the fan who wants to get ringside seats to a good fight, whether it means attending heavyweight, welterweight or bantamweight bouts.
Lorayne Fiorillo is a financial advisor and first vice president of investments at Prudential Securities Inc. Past performance is no guarantee of future returns. For more information, write to Lorayne in care of Entrepreneur, 2392 Morse Ave., Irvine, CA 92614.