This article is of the opinion of the writer and does not constitute financial advice; if you require advice of a professional contact your financial advisor or bank manager.
Assessing Risk and Reward
Written by R. A. Stewart
Assessing the risk of loss compared to the rewards is a balancing act and requires a bit of insight and knowledge of what you are investing on. This issue has been brought to my attention a couple of times recently. It was only yesterday I received an email from a website which holds bitcoin funds; the email was promoting a special offer. Invest a minimum of $100 US into Ethereum for 4% interest. This was not an offer to purchase Ethereum itself but rather than purchase Cryptocurrency as a means of making Capital Gains you would be investing money for a guaranteed return of 4%. This is a poor return for the risk involved and of course I gave this one a miss but with the low interest rates at present there will be some people who will be tempted if offered this kind of investment.
Finance companies that offer investors higher returns to investors are lending their money to higher risk borrowers; therefore there is a greater risk of losing your money. Prior to several finance companies collapsing in New Zealand during the Global Financial Crisis of 2007/2008, many financial advisors were saying, “The higher interest rates do not reflect the higher risk investors are taking on.”
Many rejected that advice with disastrous consequences.
Sports betting and horse racing provide perfect examples of risk and reward.
In the Australian Rugby League Melbourne Storm were playing Sydney Roosters. Melbourne has won almost two-thirds of their games since their formation in 1999, therefore if you backed them in every game you would need average odds of $1.50 (1-2) just to break even, yet they were paying $2.20 (5-4). This was over the odds.
In the same weekend, Brisbane Broncos, a team that had lost it’s last five games was favourite against the NZ Warriors. Brisbane were paying $1.60 which was a poor price for an out of form team; they lost.
It is the same with horse racing. If there are equal favourites with one that has won one race in 14 starts and another that has had two starts for one win then which would you prefer? The one that had only been beaten once is the better bet.
You have to do the mathematics and ask yourself this question, “If I backed this horse at all of it’s starts would I be in front with the odds it is paying in today’s race?”
Getting back to investing in the financial markets one has to assess the risk and weigh it up as opposed to the rewards.
One very important point to remember is this; “Whenever there is a possibility of capital gain then there is also the possibility of capital loss.”
Investors need to get used to losing occasionally and get into the habit of taking calculated risks. If you have not had any financial setbacks it means you are not taking risks.
Taking risks is not the same as making foolish financial decisions. Just be sensible with your investing and invest according to your plan and timeframe when you require the money.
This is some guide;
Short term (with one year) Conservative funds
Medium term (one to five years) Balanced Funds
Long Term (Six to ten years & longer) Growth Funds
Adding another category would be speculative investments.
There is no guarantee what will happen to the markets this decade and in particular post-covid, therefore it pays to diversify your investment portfolio and it is for that reason that some investors are turning to gold as another string to their financial bow but like all types of investments you have to do your research.
You can learn about investing in gold from the link below: