In this blog we are going to talk about risk and how important it is to know how to evaluate risk in purchasing assets. Each asset has its own risk when making financial decisions and acquiring wealth.
Some of the risk assets that we will be discussing are the stock market, real estate and acquiring a business.
When we evaluate the stock market, fixed income (CD’s & TIPS) is the safest investment to be in but creates an exceedingly small yield. However, sometimes to generate a higher yield one must take a higher risk to generate a higher yield or return on your investment. In general, the stock market can be very risky when trading on your own.
Diversifying your assets into many different categories like , cash, stocks, ETF’s, bonds, mutual funds, REIT’s, Emerging Markets, commodities, and gold can help reduce risk. Trading options can also be risky, but the amount of money you can lose may be less than purchasing the stock outright. I suggest either finding some financial advisor to guide you on how to set up your portfolio or educate yourself on how to trade when taking risk in the market.
Real estate can also carry many types of risk.
Encumbering a title can be as risky as flipping a house, but the amount of money placed into encumbering a house is a lot lower risk because of the amount of money you need to put down to acquire the asset. When looking at acquiring real estate focus on these rules; Location is everything, make sure that you acquire your investment in a good and growing location. When flipping a house, buying the house at a good price and calculating the repair costs are the most important things when flipping a house. Also, always buy a property so that you never need to come out of pocket with any more cash. If you follow these simple rules usually you will be fine when acquiring your investment.
When purchasing a business, just acquiring the business can be extremely risky if you do not know what you are doing. Usually knowing something about the business you are going to start can help jump start the business to success. However, most of the time it’s better to buy an established business.
Remember that to be successful in business you must create value for your customer.
Here are some examples of creating value: inventing a product, creating a service, creating better customer service, better quality, increasing convenience, changing lifestyles, offering discounts, and improving someone’s life. Also don’t forget that a good resource center like the Small Business Administration can help with business plans that include an executive summary, company description, market analysis, organization and management, service or product line, marketing sales, and funding.
Again, I suggest having a good business broker and a good attorney when acquiring a business.
There are many professionals that can guide you through to help evaluate your portfolio when preserving your wealth such as financial advisors, estate planners, CPA, business attorneys, protection attorneys, and mentors.
If you don’t take risks, you cannot gain wealth. Just be smart about it and, in your later years, learn to reduce the risk and protect your assets throughout your lifecycle.
For more information on understanding risk you can go to www.DiverseInvesting.com or purchase The Road Map to Investing on Amazon.
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