A very common question asked in investing is the relationship between Risk and Return. Surprisingly most people believe Higher Risk - Higher is the Return.  Before we understand the relationship between the two, let us understand what exactly is Risk and Return. 

As per Wikipedia,  
RISK - Risk is the possibility of losing something of value. Values can be gained or lost when taking risks resulting from a given action or inaction, foreseen or unforeseen. Risk can also be defined as the intentional interaction with uncertainty.



Return - In finance, the return is a profit on an investment. It comprises any change in the value of the investment, and/or cash flows which the investor receives from the investment, such as interest payments or dividends. It may be measured either in absolute terms or as a percentage of the amount invested.

In simple words, Return is a profit from investment and Risk is a situation involving exposure to danger.

People lose their money because they don't take the odds in their favor. Most people become too conservative or aggressive in their investing losing the whole purpose of investing. It is observed in the history of the stock market, people losing money are those who are always on extreme ends.

Buffett believes risk has nothing to do with volatility. It is simply the probability of losing your initial investment. If there is a chance that he might lose money on an investment, then Buffett simply doesn't invest. So he follows only two rules for investing.

“Rule No. 1: Never lose money.

Rule No. 2: Never forget rule No.1” – Warren Buffett

How you can use this Rule in your investing?

  • Keep it Simple - A simple Index fund has performed better than more complex funds. 
  • Always understand the value of the product your investing (Price to Earnings Ratio) and its Return on Investment. 
  • Investment return is not decided by what you buy or sell but when you buy or sell. 
  • Don't follow the trend until you understand the complete cycle. Entry at the beginning of the cycle is lumpy, a journey in middle is trail and end is free fall.
  • Invest at the bottom and sell at the peak. It sounds difficult but, it's very easy if you cut the noise around you. 
  • Always invest Rs. 1 for a return of Rs. 4. Your investment must be on assured winnings which are minimum four times your investment. 
  • Losing is easy, Recovering is not. If you lose 50% in the market, it takes 100% to recover, so never miss of Warren Buffet rule. 
  • Investing in risking funds in long term has given marker equivalent/Index returns. So think twice before risking your money and stressing your mind. 
  • Health is Wealth.  
  • LEARN and drop the 'L'. Learning about your investment is very important before investing. Below are the links to such amazing books that will help you strategies your path to success.   



If you like this post, share it with your friends and family.