Whether you’re casting your line off the end of a pier or buckling your seatbelt, we all deal with risk and return. Somehow, when it comes to emerging markets, nominal vs real, risk-adjustments, multi-asset portfolios, protection strategies and bull vs bear markets we panic amidst an onslaught of lingo that overwhelms us.
Basically, when it comes to investments, it helps to bring things back to casting your line off the pier or buckling up, because we’re in for a bumpy ride.
All investments involve a certain amount of risk. When you attach your bait to the hook and throw it into the ocean, it may come back the same, empty, or with a nice-sized tuna. That’s the risk you take; where you cast, how often you cast, when you reel your line back and and how much bait you use. Those are all related to risk.
Risk then influences your return. The larger the bait, the larger the fish… in theory! But you might toss in a large chunk of chump and get nothing or a tiny minnow. That is a risk that you take and a return that you realize might be a reality.
When we apply this to investing money (this is done where business happens, aka: markets), where you invest your money, and how much you invest, is the risk that you take. There are a whole stack of strategies around this, and that’s where we come in, but just remember the basics. Then, the amount of money that you make over and above the amount that you put in is your return.
Sometimes, for the financial fundis, investors like to talk about nominal returns and real returns. In the lingo, this relates to your investment return relative to inflation. So, if your return on investment is 15% (nominal return) and inflation is 6%, your real return would only be 9%, because your money is now effectively 6% less valuable.
We hope this makes it a little easier to understand! Investing is a strategic exercise that involves risk and our goal is to manage that risk relative to the return that you are looking for, within your given investment timeframe. Remember, I am always available to advise and guide you!