Understanding Investment Risk
Section 21 Module 6
When you invest, there are only three main concerns:
- Safety - How ‘Safe’ is your money?
- Access - What ‘Access’ do you have to your money?
- Returns - What ‘Returns’ will you get on your investment?
As you can see from the image above, it is not possible to get the best of ‘Safety’, ‘Access’, and ‘Returns’, in any one investment.
You will need to compromise on one more out of ‘Safety’, ‘Access’, and ‘Returns’, depending on your investment objective. i.e.:
- When you keep money in the bank, the main requirement is ‘Safety’, and ‘Access’. ‘Returns’ are not important on cash in the bank.
- When you invest in ‘Real Estate’, ‘Safety’, and ‘Returns’ are more important than ‘Access’.
- When you invest in ‘Stocks’, ‘Access’, and ‘Returns’ are more important than ‘Safety’,
“The only way to get the best of ‘Safety’, ‘Access’, and ‘Returns’, in your investment portfolio, is through diversification, i.e. not putting all your eggs in one basket.” - https://amitmitbawkar.com
Level of Risk Vs Returns
When you invest your hard-earned money, you have understand the different levels of returns you can get, and the risks associated with them.
- Low Risk = Low Returns (typically just above inflation - 3 to 6% p.a.)
- Medium Risk = Medium Returns (typically - 7 to 10% p.a.)
- High Risk = High Returns (typically above 10% p.a.)
Ideal investment portfolio should have assets with different risk levels and percentages.
It pays to be aim for around 8 to 10% per annum most of the time without taking undue risk with your earnings.