It is important to know how risk and return interact and to understand what type of investments might suit your risk appetites.
So what is Risk & Investment Risk?
Risk can be thought of as the uncertainty something happening. In investing, it could be view as the "calculated" chance that money can be lost or made on any investment. It is often be view as variability in the returns of an investment. It is how much "below and above" the average return or the return expected by an investor. As such we use the VOLATILITY as a common yardstick to measure the speed and magnitude of price changes in an investment over a period of time. (In Physics, it's known as Vector quantity). If the movement is rapid over a short period of time, it has high volatility, whereas for low volatility, the price movement is very mild, like bank deposits.
Although risks pose a threat, they also pose an Opportunity and investors need to know the best way of mitigating risk so that they can also benefit from the potential returns. But in actual fact, the general consumers not only pre-occupied with their lives, they also might not have sufficient and essential information on the investments they are embarking on. So it would be wise to engage an investment-based certified financial planner. Let's us not be penny-wise and pound-foolish.
How about returns?
Often being said, low risk, low returns; high risk, high return. Likewise, the same is true for loss. But I always take the stand as low risk products will certainly and definitely gives low return, but high risk might not give you high return. It's the "managed" high risk approach that would gave the investors the "expected" high returns. This "return expectations" of an investors would depend on a few factors, such as the investors' risk appetite, investment type preferences, the committed investment amount and whether the products are suitable for the investors and other considerations that the investors might feel great importance and concern. These personal concerns that investors might have, need to be addressed first before they commit.
In reality, returns might not need to be managed. More often than not, investors are generally delighted when their investment are in the "black" and on the rise. Personally, the investors should use a yardstick to measure their expected performance on a certain time frame. In this way, the return objectives would be met. Therefore, an investor's financial goals and attitude to risk will be a guide to what types of investment will best suit them. We are aware that different asset classes have associated risk/return profiles.
In conclusion, although Risk and Return are at different side of the coin, however, they are like an identical twins and have to go hand in hand. They are inseparable because they are two different faces of the same coin.
