When it comes to achieving financial freedom and retirement, most experts agree that individuals will need between 70% and 80% of pre-retirement income to live comfortably, yet according to a study done for the brokerage firm Merrill Lynch, current low-savings statistics show that many individuals are falling short. Trends such as the disappearance of pensions, uncertainty of Social Security and Medicare, growing US public debt and rising health care costs are making saving for retirement even more critical. A recent article in the Wall Street Journal described the deficit of Social Security and Medicare as a "$74 Trillion = Crisis." Today more than ever, planning for your financial future demands that you stay ahead of the financial factors that shape our economy.
The first principle of wealth creation that you must understand is the concept of Risk vs. Reward. This well-known concept states that the higher the risk of a particular investment, the higher the possible return. The most common definitions of risk include "the possibility of loss" or, in other words, that we might lose some or all of the money that we invest. Other financial advisers define risk as the likelihood of earning less from an investment than the interest available from insured Savings Certificates or U.S. Treasury Notes. Whether your level of risk tolerance is high or low, this is the general concept underlying any investment by which a return can be expected.
Anytime you invest money there is a risk involved, whether large or small, that you might not get your money back. Therefore, you expect a return on your investment to compensate you for bearing this added risk. In theory, the higher the risk, the more you should expect to receive for holding the investment, and the lower the risk, the less you should expect to receive. However, many investors do not understand how to determine their appropriate level of risk tolerance, or the level of risk their individual portfolios should bear. Again, it is important to remember that every investor is different and that there is no one model that works for everyone.
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Author
Chad Sunyich |
