Once an investor has established a strong foundational base of liquid savings, then he or she is ready to begin building a portfolio of broadly diversified holdings. The challenge of investing is that there is always the possibility of losing money. Taking calculated risk is absolutely essential for successful investing, but one must remember that the risk must be calculated. If it is random, then an investor is opening himself or herself up to potentially devastating outcomes. Uncalculated risks would involve things like investing in a stock because your friends at work convince you it is a “sure winner.” The investment world is unfortunately littered with the dead carcasses of failed investors who have fallen prey to these “hot tips” one too many times.
Intelligent investing is heavily dependent on taking calculated risks. The best way to develop a solid investment plan that takes a full account of all possible risks is to consult with a Certified Financial Planner. Also, the degree of risk you do take is heavily dependent on your age, income, and earnings potential. An investor in his or her early 30’s can take risks that a 55 year old cannot afford to take, simply because the 30 year old still has plenty of time to recover from larger losses, while a 55 year old does not. Thus, an investor must have a very strong conviction and understanding of his or her specific risk tolerance, and that risk threshold must not be crossed.
As stated, once a strong foundational base of liquid savings is established, then an investor is ready to begin building a portfolio of diversified holdings. The decision on how to properly diversify should be discussed with a financial professional; however, there are certain basic investing truths that we will discuss in this article. First of all, new investors are facing unique challenges that previous generations have not had to face. Baby boomers who are retiring now have been able to invest in U.S. equity markets over the last few decades and earn substantial returns. It has been a relative guarantee over the last 40 years that an investor could faithfully invest in the U.S. stock market every year, and he or she would earn a steady 10%-12% each year, and many years were quite better than that.
Unfortunately, this dynamic has changed. Growth in the United States is changing. The current economic debacle in the U.S. is proving to be very serious. The U.S. is most likely headed for an extended period of very slow growth, and this could last for several years. The equity markets will most likely suffer as growth remains subdued. During the 1960’s, the United States was absolutely the place to invest capital. In 2010, that may not be the case.
Young investors today may be forced to look outside the borders of the United States in order to earn yield on investments. Emerging market economies such as India, China, Brazil, and Russia have growth potential that is huge. Investors may do very well to broadly diversify holdings in order to take advantage of the wonderful opportunities in these foreign markets. Foreign markets do carry a degree of risk due to the potential instability of governments and other geo-political events that could unfold, but the growth potential is also huge.
Again, an investor would do best to sit down with a Certified Financial Planner in order to determine exact risk parameters, but being mindful of this new trend in global growth may help investors take advantage of the huge growth potential in countries around the world during the next 20 years.
Falling prey to financial fraud such as a forex scam can be largely averted by only dealing with fully registered financial professionals.
