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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?
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Risk
and return are not always correlatedthey
must be assessed separately. Taking
greater
risk does not always mean you'll get
greater
return.
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When
investors shun risk, prices fallthe
risk becomes less and the potential
for profitable investment is
greater. The price you pay
determines your risk.
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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.
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Do
not try
to get a higher rate of return
than is needed to reach your investment
goalsif
you only need a 6% return and you
try to get a 10% return, you run the
risk of not achieving the easily achievable.
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If
you invest in small, new or foreign
companies, and compare your results
with the S&P 500you
are comparing to a lower risk
benchmark that can make you feel you
are doing better when you are
doing worse.
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Trusting
your advisor to use
"superior" abilities results
in their taking too much risk on your
behalf.
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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.
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Reading
business news and watching CNBC
leads to using
information that is meant to entertain
rather than provide investor value.
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Joining
chat rooms or getting a stock tip
leads to
acting on information from a questionable
source with questionable motivations.
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There
is no evidence that you can learn from and be like successful
investorswhat made them successful is
usually replicable today and you
probably don't have
the intelligence and emotions to
execute in the same manner.
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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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