Investment risk and return
Investment return and risk are two interconnected and interdependent factors.
Source: www.investopedia.com
When we seek to earn as much as we can, we should understand that we have to tolerate a higher investment risk. The higher the expected return, the higher the investment risk and vice versa. It is essential to understand that investment risk is described in the financial market as a possible fluctuation in the value of the money you have invested.
Investment risk is particularly clearly described by the standard deviation concept. It is an index calculated for a period of three years by taking into consideration the fluctuation amplitude of investment funds.
Each form of fund is characterised by a certain risk you should be aware of when making your choice of the fund for investment. Stock funds are characterised by the highest investment risk because 100 percent of your money is invested into the stocks of companies. This risk can be divided into the following categories:
- High risk stocks—stock funds of small companies;
- Medium risk stocks—stock funds of medium size companies;
- Lowest risk stocks—investment into the shares of large companies.
Mixed and balanced funds that invest in stocks and bonds have medium investment risk:
- The more stocks there are in the portfolio, the higher the investment risk;
- The more bonds there are in the investment portfolio, the lower the investment risk.
Bond funds that direct money into debt securities are characterised by a low, although not the lowest, risk. Such funds can be divided into the following categories:
- High-risk bonds—bond funds of companies
- Medium-risk bonds—mixed company and government funds
- Low-risk bonds—government bond funds and short-term bond funds.
Money market funds are characterised by the lowest investment risk because the funds received are invested into money market instruments such as short-term high yield bonds, certificates of deposits, treasury notes, etc. They are also the funds that earn the lowest yield.
The key aspect – diversified investment risk is not a shortcoming, but a possibility to earn more!