Understanding Investment Risk
When investment market is not working for you, the amount of money you may lose in one particular investment event is what we call risk. When represent risk with an R index number. We identify the possible worst situation and the worst loss that can happen when the item did not progress according to our plan. When you start estimating the amount of risk, the R, you bear in an investment item, you are focusing on the return to risk ratio. Perhaps you are already doing the same in other aspects of your life and now is the time to apply it to money.
When investment market is not working for you, the amount of money you may lose in one particular investment event is what we call risk. When represent risk with an R index number. We identify the possible worst situation and the worst loss that can happen when the item did not progress according to our plan. When you start estimating the amount of risk, the R, you bear in an investment item, you are focusing on the return to risk ratio. Perhaps you are already doing the same in other aspects of your life and now is the time to apply it to money.
We make decisions every day, every hour. When options come up, we have to assess each one and go for our final decision. Just like things as little and normal as going home. You have two choices. You get choose to drive on the high way where you could arrive home within 30 minutes. But there is a risk you bear. In case there is a traffic accident, the traffic jam would engage you for another two hours. A safer choice would be to take the street where it is less crowded. But there are many annoying traffic lights and it takes at least 45 minutes to get home no matter how free the road is.
You would begin analyzing the two options and decide whether getting home 15 minutes earlier is worth the risk of being trapped in traffic jam for 2 hours. Similar decision making process can be seen in investment managements. The important reference is the ratio between the expected return and the potential loss you may pay. The ratio must be high enough to justify the actions.
We have worked with top investors and see them use the return to risk ratios in real situations. The best always consider the risk they bear before putting their eye on the potential return. Investment opportunities are ranked with the ratio, denoted in R, the risk factor. If the largest amount of money you may lose in an investment could possibly get you 3 times the amount as return, we label it a 3R investment opportunity. This system is applicable to all kinds of investments, like stock, mutual fund, property or other investment vehicles. And it means the same for a 2R investment in stock market or in the property market. They mean the expected return over the worst loss equals 2. Below is an illustration.
The first example is the situation where you have already decided to buy a house with a compromised price and sell it quickly thereafter. This is a quick cash transaction. You have decided to use USD5000 to buy a USD80 000 house. The amount USD5000 is the risk factor R which is the largest amount you can bear to lose. You wish to sell the house with a USD100 000 price. That is, a USD20 000 profit. This will be a 4R opportunity, because your planned profit is 4 times of the risk you bear.
If the property market turn out milder than you predicted and you sold the house with USD90 000, you get USD10 000 profit. It would become a 2R investment, i.e. the return you get is 2 times the risk you bear.
When investment market is not working for you, the amount of money you may lose in one particular investment event is what we call risk. When represent risk with an R index number. We identify the possible worst situation and the worst loss that can happen when the item did not progress according to our plan. When you start estimating the amount of risk, the R, you bear in an investment item, you are focusing on the return to risk ratio. Perhaps you are already doing the same in other aspects of your life and now is the time to apply it to money.
We make decisions every day, every hour. When options come up, we have to assess each one and go for our final decision. Just like things as little and normal as going home. You have two choices. You get choose to drive on the high way where you could arrive home within 30 minutes. But there is a risk you bear. In case there is a traffic accident, the traffic jam would engage you for another two hours. A safer choice would be to take the street where it is less crowded. But there are many annoying traffic lights and it takes at least 45 minutes to get home no matter how free the road is.
You would begin analyzing the two options and decide whether getting home 15 minutes earlier is worth the risk of being trapped in traffic jam for 2 hours. Similar decision making process can be seen in investment managements. The important reference is the ratio between the expected return and the potential loss you may pay. The ratio must be high enough to justify the actions.
We have worked with top investors and see them use the return to risk ratios in real situations. The best always consider the risk they bear before putting their eye on the potential return. Investment opportunities are ranked with the ratio, denoted in R, the risk factor. If the largest amount of money you may lose in an investment could possibly get you 3 times the amount as return, we label it a 3R investment opportunity. This system is applicable to all kinds of investments, like stock, mutual fund, property or other investment vehicles. And it means the same for a 2R investment in stock market or in the property market. They mean the expected return over the worst loss equals 2. Below is an illustration.
The first example is the situation where you have already decided to buy a house with a compromised price and sell it quickly thereafter. This is a quick cash transaction. You have decided to use USD5000 to buy a USD80 000 house. The amount USD5000 is the risk factor R which is the largest amount you can bear to lose. You wish to sell the house with a USD100 000 price. That is, a USD20 000 profit. This will be a 4R opportunity, because your planned profit is 4 times of the risk you bear.
If the property market turn out milder than you predicted and you sold the house with USD90 000, you get USD10 000 profit. It would become a 2R investment, i.e. the return you get is 2 times the risk you bear.