Risk & Reward: Know Your Inner Balance

Risk, in all of its various forms, plays a significant role in all investments. Typically, investors think of “risk” as it relates to the potential for loss of their investment capital. Depending on the amount of investment funds available and a person’s investing “temperament”, each investor has an “inner balance” between the amount of risk he/she is willing to assume in an investment in relation to the possible returns he/she seeks to earn.

The old investment axiom – the greater the potential for reward, the greater the risk – remains true today. Many investors have achieved an inner risk balance by constructing a diversified portfolio of investments (with some capital allocated to very low risk investments and other capital invested in more aggressive, higher risk/higher potential reward investments). For other investors however, only the safest of investments (lowest risk) can give peace of mind.

It’s important for each investor to conduct a self-assessment, seeking to determine what level of risk tolerance will satisfy his/her personal inner risk balance. Investments such as in a hedge fund are only suited for those investors who have the temperament to assume a higher level of risk in return for a higher potential for reward. In an Hedge Fund investment, only risk capital should be used. If your personal temperament leads you to be risk-adverse, then a hedge fund investment  (along with other higher risk/higher potential reward investments) is probably not for you. Ultimately, what is or is not right for you is a determination that only you can make.