How many times have you heard your parents and teachers say “today’s pain, tomorrow’s gain”? Well, it must have been at least a hundred times since the no-pain-no-gain ideology has been around for centuries. It is no surprise that stock market investors and traders have picked up the phrase. Investing comes with its share of pain, but being smart about choosing the stocks at the right time can give you quite a bit of gain.
That brings us to the next question – is the pain of investment always worth it? There is a strong mutual relationship between risk and reward in any share market, but exactly how much risk to take should depend on market intelligence, analysis, prediction and market trends. We can’t help but mention another cliché here “higher risk promises better gains”. Well, exactly how true is that for stock market returns? Do higher risks always bear promises of better gains? Turns out, there is another part to the concept of “higher returns” that market experts rarely mention. To explain the relationship between risk and profit you should consider that high risk also reduces the probability of enjoying a higher profit margin.
Are you ready to take more risks in the stock market?
That is exactly where people start panicking. We always end up associating risk with losing money. Well, in stock market investments, there is always the chance of loss. However, not all risk should be evaluated in terms of gain and loss. There are other factors you need to consider.
- What is my priority? Should I think about the safety of the principal right now or should I worry about the growth?
- Will taking fewer risks allow me to reach the investment goal? Will I end up making lesser than I had estimated at the end of the stipulated period?
- Am I ready to take on more risks at this moment for higher returns? Will I be able to handle the anxiety and uncertainty for the time being?
What are the seven reasons you should think about taking more risks?
These are a few basic questions every investor should be asking before taking on riskier investment options. However, the allowance of risk varies between people. It depends on their financial background, amount of surplus, family dependence and age. Here are seven good reasons you should consider taking risks right now –
- Starting young allows you to take more risks
It is true that when you start investing early, you have more time to reach your investment goals. As a result, young market investors are more likely to take risks and opt for potentially high return stocks. Older people, who have only a few years in hand before they retire, will be thinking about their retirement funds and the pressure of reaching the investment goal is significantly high for them. Thus, the older veterans are less likely to take risks.
- Long-term investors can take more risks
When you are investing early in your life, you can opt for long-term investment options. If you follow the performance of any company shares, you will notice great degree of fluctuation over a short period (a month or two months). When you see the performance of the same shares for over 3 or 4 years, you will see a steady increase in the valuation. This goes on to cement the belief that long-term investors are almost immune to high risk investing.
- Ownership of a company!
Common stocks bear higher risks than the preferred stocks. Preferred stocks generate a yearly dividend even when the company is going under. However, common stocks hold no such promises. In place of security, it brings the right of voting during the election of the company board of directors, a small extent of ownership and participation rights in the internal workings of the company. Therefore, in the event the company makes big profits, each common shareholder gets the chance to decide if they want to invest the returns once again or redeem the dividends. The risk of owning common shares is high, but the size of the reward is much higher.
- You get a chance to overcome the inflation
Do you want to be that investor, who goes on earning 20,000 flat throughout the better part of his life? Or, do you want to make it big and keep pace with the inflation? As the prices of common commodities are rising through the roof, it is only logical to think about future savings. Regular schemes proposed by banks and financial institutions hardly have enough power to overshadow the inflation in the next 20 or 30 years. Investing in high risk shares open several new avenues for you to make up for the depreciating value of the rupee by investing in shares that have growth rates higher than that of the speculated depression.
- Aggressive investment policies make better portfolios
Aggressive portfolios usually bear the secrets of maximizing the market returns. The aggressiveness depends on a number of factors apart from the company credentials. It depends on the distribution of the investor’s money between high-risk and high-reward asset classes. These usually include both commodities and equities. Investing more money in the small-cap stocks is riskier than investing in blue-chip stocks only, although both are forms of equity. There are diverse ways of expanding your portfolio by adding equity components and commodity types. A diverse and more aggressive portfolio might attract higher risks, but they also attract better returns.
- You will never make the best of an opportunity
When the bear takes over, things can get a little jittery. It is the perfect reason and the ideal time to take risks. When the market is slow the prices of the most premium stocks also experience depletion. It is the right time to grab the chance, invest in blue-chip stocks and ride through the bear market till the tides turn. Of course, speaking with your agent is necessary before buying, but the part about embracing risk is completely your discretion.
- Not taking enough risks is the riskiest move
Not taking risks at the right time can hinder the growth of your portfolio and its returns. In fact, according to the market experts, not taking risks is the worst decision any young investor can take. In the recent years, several investors have pulled their assets from mutual funds and hedge funds because their chosen market intermediary (broker or agent) was too passive. Portfolios that reflect a market index cannot outrun inflation or the depleting value of Rupee.
There are exceptions to every situation. If you are a young investor, who cannot afford to take risks due to the lack of surplus money, you should stick to a less aggressive portfolio. On the other hand, if you are an experienced investor with enough assets available for investment, you may invest more in small-cap enterprises to experience high growth rates. In reality, there is no one strategy that fits all. Your strategy will depend upon your priorities and investment preferences.