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Understanding Investment Risks in Relation to Returns Before You Invest

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Making an investment is inherently risky, and smart investors are wise enough to avoid investments proposals offering/guaranteeing zero risks. Low-risk investments typically generate low returns and high-risk investments often bring relatively higher returns. All investors have a basic understanding of the kind of risks that they are willing to take; yet, investors often make mistakes in measuring their risk-taking quotients.

An investor who comes up as a risk-taker during risk profiling prior to making an investment might exhibit signs of risk averseness when their money enters the market. The fact is that people act differently in theory than they act in practice when their money is on the line. The key to creating the right portfolio that balances your risk-return appetite is to know the kind of investor you are – and not the kind of investor you want to be.

Investment Risk vs Reward

 

3 basic types of investors

  • Conservative investors

Conservative investors tend to put their funds into low-risk, long-term investments. Conservative investors tend to gravitate towards low-risk assets such as CDs, savings bonds, treasury securities, insured municipal bonds, and life insurance from trusted carriers. Conservative investors also seek out stability in their investments; hence, they are not likely to invest in industries/markets that are on the eve of a disruption. Conservative investors typically don’t mind waiting for 10 years or more before they see any significant return on their investments.

  • Moderate investors

A moderate investor will take a relatively higher risk than conservative investors, and they tend to put their money investments that have medium/average risks for medium returns.  Moderate investors tend to put their money in mutual funds, ETFs, government bonds and some investment-grade corporate bonds. Investing in corporate bonds is akin to lending money to a corporation; hence, the return on investments is often directly related to the interest rate.

  • Aggressive investors

Aggressive investors are also called speculative investors – they typically love taking big risks inasmuch as there’s a promise of supersized return on investments. Speculative investors typically tend to focus on price gains within a relatively short period. Ian Robertson, an analyst at Weiss Finance observes that “aggressive investors tend to buy the stock of tech firms, biotech companies,  or small startups threatening the monopoly of bigger players”. Aggressive investors are also not afraid to back new ideas such as Bitcoin, 3D printing, or self-driving electric vehicles.

High-risk VS low-risk investing

Many potential investors find it somewhat difficult to know if they should opt for the stability of low-risk investments or the impressive returns of high-risk investments. It is practically impossible to find a low-risk, high-reward investment, that is not a scam or ponzi scheme.

Unfortunately, many potential investors often allow their indecision to induce an activity paralysis that keeps them out of the market. Low-risk investments can be great assets if you are newbie investor, you don’t have much money to invest, or you hate losing money.

You won’t necessarily make a fortune overnight on low-risk investments; but then, you won’t lose your money overnight either. Critics of low-risk investments often dwell on the low returns, but the fact that your ROI is slow and solid makes it easy to exit bad investments without losing a significant part of your initial investment.

High-risk investments will deliver impressive returns to reward investors willing to embrace the inherently high risk. To play the game of high-risk investments successfully, you must be willing to embrace new trading tools such as AI, alert windows, social trading tools.

However, you can lose a large part (or all) of your investments in high-risk investments because of the steep volatility when the tide of the trade turns against you. Nonetheless, you can protect your downside in investing in speculative assets by hedging your trades. More importantly, a properly diversified portfolio should have a mix of low-risk and high-risk investments across a wide range of industries and markets.

All trading carries risk. Views expressed are those of the writers only. Past performance is no guarantee of future results. The opinions expressed in this Site do not constitute investment advice and independent financial advice should be sought where appropriate. This website is free for you to use but we may receive commission from the companies we feature on this site.
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Victor Alagbe

Victor Alagbe is a seasoned business and finance writer with a specialty in writing about how to invest for the long-term in healthcare, pharmacology, energy and tech stocks. His long-term focus is on stocks that provide a nice mix of growth and income. For the short term, he passionately writes about trading stock options for the excitement and leverage that stock options offer.

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