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Risk and Returns- Moving in Tandem


Risk in investing is often seen as a dirty word.

When people hear that something is low risk, people will flock to it. But the flip side is that something that is low risk will correspondingly have low returns.

In order to retire comfortably and overcome the drag of inflation hitting your spending power, taking on more risk is something everyone should take in. With higher risk comes higher returns.

If you look at a chart of stomach churning price movements, there are both big swings down and up. Most people lust after the big upturn.

But to succeed as an investor, I think it is much better for markets to be down first. That is the time to buy. When value exists in almost all companies.

That is the time of maximum risk, maximum pessimism. And it is also the time when the chances of an upswing is the highest.

But would you have the courage to invest?

The flip side is during times when risk is viewed as low and economy is booming and everyone seems to be in the market and making money from it. That is a time to consider taking profit on counters that you own and building your cash pile.

What about now?

I would think this is still a buy and hold period as economies have not fully recovered from the financial excesses of previous years and the subsequent meltdown which occurred.

What about you? Where do you think the market is headed?

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la papillion said...
February 9, 2011 at 4:06 PM  

Hi lemi,

I think there are different types of risk. The academic definition of risk is price volatility, whereas the layman's definition is whether there'll be danger in losing money.

For both traders and investors, it's good that a stock has price volatility (academic version of risk), so that one can enter at a opportune time. For both traders and investors, it's paramount that there'll be low risk of losing money (layman's version of risk). For traders to mitigate this layman's risk, they'll buy when their signals are triggered. For investors, they'll buy when the price is below the value.

A bit out of point, haha :)

Anonymous said...
February 10, 2011 at 8:37 PM  

Hi Lemi,
If I have bought very near the bottom, I would have taken profit for at least 50 % of my portfolio.(To reserve for bullets for next round.) So far I have sold only 30+ % of my portfolio. For me, I still think the game of musical chair has some time to play.
US seems recovering quite nicely, the only joker now is China-run-away inflation. As for Europe? I think today situation depends on China more than any others. Please, this is only my rubbish opinion not facts.
But whoever investing in the market must have an opinion if not it means he/she is lost somewhere.
Ha! Ha!

Anonymous said...
February 23, 2011 at 5:14 PM  

I feel that the uptrend of the markets is too good to be true.

Not so long ago, we were "on the brink of the next Great Depression".
After some money-printing by central banks and so soon we are on the way to recovery. I don't have confidence in this kind of recovery. It's not built on good foundation and I fear that any kind of shock can easily bring the markets down.

I'm a pessimist, so it could just be me :P

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