How to effectively manage the risk and return ratio of your investment
How the two key components of the investment are to be interpreted and managed
At the basis of any investment choice, you cannot ignore the relationship between risk and return .
Typically, individuals make their investment decisions by following a widely held assumption in the financial world that “the more risk you take, the greater the returns you can get.”
This relationship refers to the concept of a prize in the financial sphere.
However, in everyday life it has been demonstrated, thanks to some psychological studies conducted by Mertz, Slovich and Purchase in 1998 and by Slovich in 2000, that investors do not consider risk as an objective factor and have an widespread tendency to avoid risky investments. This attitude penalizes the investment objectives, which instead require a rational risk assessment (and therefore, for example, its diversification).
What are the risk and return of an investment
The yield represents a measurable value and indicates the capital that is obtained through the investment activity. To invest with awareness it is important to establish realistic forecasts of returns, always considering that it is possible to earn a higher return if you are willing to take more risks.
A return can be negative or positive : in the first case the investor gets a loss, in the second one gets a profit that exceeds the initial investment capital.
The risk instead, it is a variable that indicates the degree of uncertainty that an investor must endure to obtain a higher future return. The higher the number of elements an investor cannot control, the more risky an investment can be considered.
4 ways to strategically manage risk and return
Risk and return are two essential components of an investment. This is why they must be managed with awareness and strategy, seeking the right balance, in order to obtain the maximum return from your investment.
To protect your capital , you don’t need professional strategies that only experienced investors know how to put into practice. There are simple and practical operational tricks that everyone can follow, even small savers.
1. Risk is not bad for the investor.Every investment carries a risk, but this aspect shouldn’t scare you because the risk can, on the contrary, allow you to make big gains. Taking risk in your investments is essential to obtain the best returns and must be a rational business.
2. What is your risk appetite? Before investing you need to define how much you are able to tolerate a default. The definition of your risk appetite is realized through the analysis of various elements such as your family situation, your assets, your saving capacity, the time horizon of the investment and your character.
3. Remember to diversify, always.Alternative investments are a valuable asset that can be leveraged to balance the risk and returns of your portfolio. By virtue of their poor correlation with traditional assets, diversification guarantees excellent benefits and increases the chances of obtaining better returns.
- Consider the effect of inflation on returns. When we talk about yield we can refer to the nominal yield and the real yield. The nominal yield represents the value that does not take inflation into account, while the real yield is the value that has undergone a devaluation due to the decrease in the purchasing power of the currency, which occurred during the investment period.
Investing in real estate crowdfunding? Here’s how to maximize your return and minimize risk
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The secret of the success of our platform has been to have guaranteed our lenders high returns, giving them the possibility to minimize the risk of their loans.
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Loans on Ethical Return are low risk for 2 essential reasons:
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