If your investment’s returns have been going up and down like a roller coaster ride and keeping you up at night, then understanding a fundamental investment principle called Risk/Return Trade-off may help you.
The concept is also known as the “ability-to-sleep-at-night test”.
A common misconception is that higher risk equals greater return. The Risk/Return Trade-off tells us that higher risk gives us the possibility of higher returns. Remember, there are no guarantees.
You should find a balance between your desire for higher returns and your willingness to accept the higher levels of uncertainty (risk).
What is Risk?
Many investors view investment risk as the possibility of losing part of your capital. Think of risk as the potential for a negative return on an investment — the higher the probability of a negative return, the greater the risk.
Additionally, the greater the range of possible returns associated with an investment, the higher the risk. Therefore, risk refers to the variability or volatility of an investment’s return. If an investment’s value fluctuates only slightly from year to year, the investment has relatively low risk, while wider value fluctuations reflect a relatively high risk.
We want to help you reduce the risk you have in your portfolio while maintaining or improving your return potential. Contact us for further clarification or go to our website to learn more about your personal risk tolerance.