We all want the best possible returns on our investments. Not only that, we also want so see those returns quickly and to be reassured by those giving us financial advice that we will only gain and not incur any losses.

That is essentially what most people would like when it comes to their money, but the reality is, when it comes to investing there is always some degree of risk involved and it is essential to make calculated risks. There must be an investment strategy based on your risk profile and goals.

Risk is simply the possibility of loss, and when you start using words like risk and loss with a first-time investor, it can make them very uncomfortable and even reluctant to invest and that is understandable.

Nobody likes to lose, especially when the loss is money in these harsh economic times.

Some first-time investors do not fully understand loss and risk and it is this misunderstanding that leads them to believe that the risks of investing outweigh the gains, and that it is better for them to not invest and instead simply save.

Investing can be confusing for some, and because they do not fully understand how it works and think they may never understand, they choose to play it safe and keep their earnings in a savings account.

I believe if more time was spent explaining risk and loss to a first-time investor, then he/she would be more confident and optimistic about investing. That investor would also understand how returns on investments work and with that knowledge, expect more realistic gains based on their understanding of the risks and returns of securities.

As a first-time investor, deciding what to invest in can be a difficult process for you and it is best that you first try to understand your risk tolerance. Essentially, your risk tolerance is the level of losses you are willing to withstand before you are ready to call it quits on an investment.

There are several factors that will determine your risk tolerance, such as your age, the time horizon of the investment, your goals, and how much loss you’re willing to accept. If you are young or have a long time horizon for the period of the investment, it is easier for you to endure more risk, as you will have more time to recoup any loss incurred and still make a return on your investment.

Generally speaking, the greater the degree of risk the greater the propensity for higher returns.

INVESTING IS NOT A GAMBLE

It is common for first-time investors to think of the losses in their investment portfolio to be similar to losses incurred from gambling. However, the two are totally different: investing is not a gamble, it is a very strategic process.

When you create an investment portfolio strategically, it is tailored to the level of risk you are comfortable with, and it would be extremely rare for you to have a well structured and diversified portfolio and lose all that you have overnight.

Losses in a portfolio happen over time and gains are the same. This is why it is important to plan your investment based on factors such as the purpose of your investment and the time horizon of the investment. With a goal and a time span in mind, you can properly assess your needs and select the assets that will give you the desired results.

Every portfolio must have an objective and the objective will determine which securities to add to your portfolio.

Typically, there are four portfolio objectives that you can consider based on your risk tolerance.

The first portfolio objective, principal preservation, is a portfolio designed to keep the original principal or sum invested secure. With this type of portfolio, the investor can consider treasury bills or certificates of deposit which are considered to be some of the safest investments that you can make. The returns may be low, but you will feel more secure knowing that the funds you originally invested is not likely to decrease.

The second type of portfolio, an income objective portfolio, is more focused on income-generating assets such as preferred stock and bonds. With this you can look forward to frequent payments in the form of dividends from stocks or coupon payments from bonds.

The third type of portfolio, the growth of income portfolio, focuses on generating income that increases over time. This involves splitting your investments between income-generating securities, such as bonds and equities that pay dividends.

The fourth type of portfolio, a capital appreciation portfolio, focuses on growth assets that increase in value. In most cases, portfolios like these have a higher allocation of equities and are more aggressive and entail a higher degree of risk in your portfolio in comparison to the other types mentioned before.

Creating a diversified portfolio spreads your risk across various asset classes and markets so that the possibility of significant loss is reduced.

Seek financial advice, but also try to understand the various ways that you can invest and build the future that you desire. By understanding key concepts of investment, you will be in a better position to make confident and sound decisions about your investments and your future.

With your goals in mind, avoid unnecessary risks and invest some time in understanding how to invest your money.

Jerron Johnson is a Processing Associate at Stocks and Securities Limited.