Investment Return and Risk

 

With the advancement of science and information technology, and the popularization of financial knowledge, most people have begun to realize the importance of financial investment. When entering the market for the first time, we often hear that investment involves risks, so understanding risks is one of the topics that investors must learn before entering the market.

So what is risk? Risk can be understood as market uncertainty, which can be quantified as volatility. When investors are exposed to greater market volatility, they can expect to receive higher returns, but prices can go up or down. Investment is a double-edged sword, so don't ignore the fact that while achieving high returns, you may also suffer large losses.

Before actual trading, investors must first understand the risks they can bear. Everyone has different risk tolerance. In fact, most people overemphasize the returns they can get, are overly optimistic and underestimate the investment risks. Once they recognize the risks after entering the market, they may trigger a series of wrong decisions at any time, affecting their investment mentality, leading to large losses or being forced to leave the market.

Simply put, investment returns are proportional to risks , which is one of the iron laws of trading . You need to clarify the relationship between the two before entering the market . It is unrealistic to say that you want low risk and high returns. But on the other hand, not investing because of risks is also another kind of unrealistic.

There is no risk-free investment

 

In the financial market, risks can be roughly divided into two types, namely unsystematic risk and systematic risk. Unsystematic risk comes from the investment target itself, and the risks faced by different targets are slightly different. Unsystematic risk can be reduced through asset allocation, which is the so-called "don't put all your eggs in one basket", but risks can only be diversified and cannot be completely eliminated. Systematic risk cannot be diversified. It is a market risk that is mostly related to uncontrollable factors such as politics, economic cycles, and natural disasters.

Some people think that buying U.S. Treasury bonds or bank deposits is risk-free, but this is actually a fallacy. Whether buying Treasury bonds or time deposits, there is a possibility of default, and the U.S. government and financial institutions still have the opportunity to go bankrupt, the so-called "black swan". It's just that compared with other risks, such a situation is less likely to occur, and the risk is close to zero and can be ignored.

At the same time, we still need to consider inflation risk. When the inflation rate is high, or when the overall asset prices are in a long-term upward trend, the actual returns on bonds and deposits will be eroded, and from the perspective of purchasing power, they may even be negative returns.

From this, we can see that there is no such thing as zero risk in the world. Not knowing how to invest may be the biggest risk. Although it is said that you should try not to get involved if you don’t understand it, if you never learn about the financial market, how can you understand the operation behind it and the possible risks?