Risk Adjusted Returns

"Price is what you pay. Value is what you get."  

When stocks or bonds fall, they are called "risky." When they rise, they are less risky. When is the risk greater, when the price is high or low?

  • Risk and return are not always correlated—they must be assessed separately. Taking greater risk does not always mean you'll get greater return.

  • When investors shun risk, prices fall—the risk becomes less and the potential for profitable investment is greater. The price you pay determines your risk.

  • Only short term government notes enable you to calculate risks before you invest. For all other investments, you have to estimate the probability and amount of loss.

Investors generally take more risk then they need to take and are able to take. 

  • Do not try to get a higher rate of return than is needed to reach your investment goals—if you only need a 6% return and you try to get a 10% return, you run the risk of not achieving the easily achievable.

  • If you invest in small, new or foreign companies, and compare your results with the S&P 500—you are comparing to a lower risk benchmark that can make you feel you are doing better when you are doing worse.

  • Trusting your advisor to use "superior" abilities results in their taking too much risk on your behalf. 

  • Avoiding risk by keeping money in CD's and bond's provides a sense of progress while eliminating your chance of reaching your investment goals.

  • Reading business news and watching CNBC leads to using information that is meant to entertain rather than provide investor value.

  • Joining chat rooms or getting a stock tip leads to acting on information from a questionable source with questionable motivations.

  • There is no evidence that you can learn from and be like successful investors—what made them successful is usually replicable today and you probably don't have the intelligence and emotions to execute in the same manner.

  • Being fooled by random luck—"even a broken clock is right 2 times a day."

When you know the risks in your investments, you can adjust to improve your returns!







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