When you’re going to invest, the first questions you need to ask yourself is: Is it a worthy investment? Is it advisable to take the risk? One of the most important evaluations to differentiate one investment alternative from another is the combination of risk that you will assume, and the benefits you expect to get (profitability).
Generally, rikier investment should produce higher returns. If it were not so, any investment alternative that report the same potential benefits to another with a lower risk would cease to be attractive.
The risk is linked to the uncertainty of the benefits you actually get by investing. You can earn more than what you expect, less than desired, or you can even lose all the money you invested. There is no way to avoid the risk because profitability will never be assured.
Each alternative for investment is unique because it combines risk with profitability. Since not all alternatives have the same risk or the same return, there are two “laws” that common sense dictates and you should consider when choosing:
- Between two alternatives with EQUAL RISK, you must choose the MOST PROFITABLE ONE.
- Between two alternatives with equal PROFITABILITY, you must choose the one with the LOWEST RISK.
As you can see, you cannot separate the risk that you will assume from the profitability you expect to get, and although an investment with greater risk should produce higher returns, be careful when deciding because there is no guarantee that that will happen. To accept a higher risk does not always lead to greater profitability.
On many occasions we have heard very encouraging expressions such as:
- Starting tomorrow I will begin to save more.
- I am convinced that I should not spend so much.
- I’ll start saving for retirement.
- I will pay all credit cards debts.
And so many others like them, which represent a good start to bring order to financial matters. People tend to promise things for themselves, but sometimes something comes up that requires that financial goals to be relegated to the background.
Just like there is a large group of people who have good intentions to straighten their economy and set their financial goals, there are others who do not even speak about these issues, much less take the minimum actions to enjoy a better financial situation . These people are not aware of the need to set goals, they believe that the world of finance is not for them or, worse, have mental laziness to think about such issues even if their financial health is critical. These people are genuinely “financially lazy”.
By their way of thinking and their attitude towards money and finance, financially lazy people own certain qualities that prevents them from achieving higher levels of welfare and economic conditions. I invite you to review your financial attitude in search of some of these signs:
- You do not have sense of urgency. If you feel that there is no reason to worry now by financial issues, or your favorite phrase is “someday” (someday we will think of retirement, someday I’ll have more money, someday I’ll be able to start saving, someday I’ll have my own house, someday we will live without debts), perhaps you are financially lazy. Never think that this is not the right time to think about money savings, loans, retirement and investments. Every day you must think in financial terms, because if you do not, your life and your family will be increasingly exposed.
- You think things are fine just as they are now and so they should stay that way. Some financially lazy people do not have a strong desire to improve their financial situation, which makes them to remain happy and static in their comfort zone. Remember that there are always opportunities for improvement; there is always space to enjoy greater welfare, but financially lazy people do not find the incentive to take the first step; They think that what they have is good enough for them and prefer to keep things as they are.
- You feel you do not progress because you are looking for perfection. Many people who want to approach perfection end up paralyzed and being financially lazy. Those people, very demanding and too harsh with themselves, are devoted to go through the same ideas over and over again; they are happy thinking and analyzing, but they fail to act, and when they finally manage to complete a mental puzzle on their financial goals, they may not know how to prioritize, they are out of ideas to take the first step, or are unable to accept mistakes and tolerate failures. Remember that fear paralyzes and the end result of thinking too much is inaction.
A minimal financial education, self-esteem and good attitude in front of uncertainties may prevent you from being financially lazy. Always act with a sense of urgency (starting today); enhance everything you can improve (never get complacent) and do not devote much time seeking perfection, because in the end who is perfect in this world?
One of the big differences between saving and investing is that by investing you are engaging part of your savings in hopes (which is not certainty) of earning some more money, which is fine, but every time you invest you will be accepting a risk , which does not happen with saving.
By investing you risk some of your money to get more money. This is one of the ways you have to make money work for you, even while you sleep, you’re on vacation or having dinner with friends; but investing is very different than playing roulette or any other casino game (where chance intervenes), so you have to do it with intelligence. To invest wisely it is not enough to have luck or intuition; you must also have a reasonable expectation of profitability, which depend on the quantity and quality of the information you have about the investment and the judgment with which you draw conclusions from it, besides the risk you are willing to take.
Even with the uncertainty and the risk involved, smart investments will grant you more control of your money and the financial independence you’ve always wanted, but never forget that by investing you will be using some of your savings and therefore, you are compromising your financial capacity.
Always invest wisely, and never risk money you need to pay immediate or short-term obligations.