I have been reading Investing for the Future by Larry Burkett on investing principles. I was struck by the author’s clarity in defining risk.
Almost without exception the degree of risk is rated based on the guaranteed return of the principle, not how much earnings the investment might yield.
The key factor in evaluating an investment’s risk is: Will I get my money back?
An investment that could lose lots of money, should provide the investor with a greater reward for their willingness to take that risk. Conversely, “safe” investments provide less reward to investors, because they have a greater certainty of getting their money back.
This explains why savings accounts are bearing such a low rate of return. The federal government has guaranteed that savings accounts up to $250,000 will be made whole, by the FDIC. Investors in savings accounts are taking almost no risk, so they get almost no reward or return.
If you are interested in earning a higher yield on your savings, please feel free to contact me at (925) 385-8798.
That is very true. The error that many investors make is that they don’t look at exterior factors when analyzing risk.