Finance - Risk vs Reward

Risk vs Reward

The most important point to keep in mind when choosing a financial product is that a risk category should be established before you select your investment vehicle. A headline rate of 10 per cent, for example, may be attractive, but the risk of the product must be fully understood before you decide whether or not the product is really right for you and your present financial situation.

When evaluating products, keep in mind that generally the higher the potential return, the higher the risk involved.

At the low end of the risk-return scale, we find cash, which has not offered good returns in recent years because the base rate set by central banks has been kept low to stimulate the economy. Liquidity with a good solid bank or building society offers low risk to an investor, but the returns are also low.

To increase the return on your capital, you will need to expose your funds to a greater risk, such as an equity-backed fund.

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