The patterns of any particular investment will detail the relative risks and rewards undertaken with each investment. Risks can be defined as "the chance or possibility of injury, damage or loss." Risk focuses on the future and our ability to forecast that future. In turn, the ability to predict the future is largely dependent on what you've learned from the past. The best you can do is to study the record and draw on experience - your own and that of others.

On the surface, the relationship between risk and return seems straight forward. In general, you will find that risk and return move in the same direction. In other words, if you accept a higher risk, it is possible to achieve higher returns. High-risk investments invariably promise a high return.

But equally important, where it is possible to win big, you can lose big. And the odds are always with the "house" (the provider of the risk-return). If all it took to create instant wealth was assuming high risks, then you could assure yourself of millionaire status simply by attending the race track every day and betting all your money on the long shots!

Avoiding Risky Investments

No other advice on investing is complete without a few important warnings. The investment industry has its share of unscrupulous people who, at best, will mismanage your investment, and at worst, steal you blind.

They'll come at you with Ponzi schemes, pyramid deals, real estate that's never been any good and never will, and telephone offers or email offers of stock or funds or oil leases or gems or precious metals, etc., that offer large and easy returns with no risk.

These salespeople play on a universal desire to "get something for nothing" and to "get rich quick." Most of us are not immune to a good pitch. However, by just taking the simple precaution of thoroughly investigating an investment offer yourself or through a trusted accountant, lawyer, financial adviser, etc., you'll greatly minimize the risk. The best caveat to bear in mind is: "if it sounds too good to be true, it probably is."

Watch out for the Ponzi and Pyramid.

In their eagerness to make a lot of money quickly, many people and millions of dollars every year are sucked into Ponzi schemes and pyramid deals. In the former, expect to lose your money, and in the latter there's a very high probability that you're wasting time and money.

In the 1920s Charles Ponzi invented a simple, alluring investment fraud that's still practiced today. In its simplest form, a swift-talking promoter will ask you to give them, say $5,000 to invest in a spectacular, usually secret, investment to which the promoter has access. They promise a spectacular return of, say 20 percent in three months.

At the end of the three months, they offer to deliver $6,000 (your investment plus your return) but suggests that you let it all "ride" for an even better return in another three months to six months. What you don't know is that there is no investment. The promoter is simply gathering as much as they can from as many suckers as they can convince. Then they have to pay Peter, it comes from Paul. Eventually, the promoter disappears with the bulk of the "investment" money.

A Pyramid scheme is an illegal type of multilevel sales- except usually there is no product sold. You are asked to pay ($500, $1,000, $10,000 etc.) to become part of the pyramid. The amount of your payment to the promoter determines your position level in the pyramid and "allows" you to promote the pyramid to others. The more people you bring into the pyramid, the higher you rise and the closer you get to the big payoff.

Financial Risk

For most investors, financial risk is the most immediate one. It centers on the simple question, "If I put my money into this investment, will I at least get my money back?"

Your best protection against financial risk is to explore any investment to the point where you understand the factors that risk and/or secure your principle. When you buy a common stock, for example, the financial risk is tied to the credit and operating histories of the company issuing the stock.

So you analyze the firm's financial capacity (ability to generate income). A firm that can't pay its debts or has a low financial capacity and a comparatively high financial risk. A company with earnings high enough to pay fixed costs many times over is thought to pose a lower financial risk.

Generally, such vehicles as certificates of deposit, commercial short-term paper, federal savings bonds and Treasury securities are considered of low financial risk. Whenever you evaluate the risk inherent in a given investment, ask yourself:

1. What kind of risk is involved?

2. What is the extent of this risk?

3. Is the potential return worth this risk?

By first learning a set of criteria with which you can evaluate an investment, and then considering those objectives in light of your personal factors, you've begun acting like an investor.