how to invest
diversification mixes a variety of investments such as stocks bonds or real estate within a portfolio to reduce portfolio risk calculating return on investment roi the primary way to gauge the success of an investment is to calculate the return on investment roi roi is measured as roi current value of investment original value of investment original value of investmentroi allows different investments across different industries to be compared for example consider two investments a 1 000 investment in stock that increased to 1 100 over the past year or a 150 000 investment in real estate now worth 160 000 stock roi 1 100 1 000 1 000 100 1 000 10 real estate roi 160 000 150 000 150 000 10 000 150 000 6 67 though the real estate investment has increased by 10 000 many would claim that the stock investment has outperformed the real estate investment because every dollar invested in the stock gained more than that invested in real estate investments and riskinvestment return and risk commonly have a positive correlation if an investment carries high risk it should be accompanied by higher returns when making investment decisions investors must gauge their risk appetite some may be willing to risk the loss of principle in exchange for the chance at greater profits alternatively extremely risk averse investors seek only the safest vehicles individuals closer to retirement commonly choose safe investments because investing is oriented toward future growth or income there is always a certain level of risk an investment may lose value over time a company may go bankrupt or interest rate fluctuations may affect bonds or real estate investments investors can reduce portfolio risk with a broad range of investments by holding different products or securities an investor may not lose as much money as they are not fully exposed in any one way 