Anyone who chooses to step into the world of business is aware that investing is a risky game. Not all can master this art that requires a deep understanding of human behavior, market trends, and one’s own capabilities. Successful investing is more about being patient and disciplined than making fast, impulsive decisions. It is a learning process involving trial and error – one must be willing to accept losses as a part of the process and learn from them to become better.
For those new to investing, the task may seem daunting at first. However, with some guidance and some practice, it is possible to become a successful investor. Ian Mausner believes that the first step is to educate oneself about the different concepts involved in investing.
Risk and Return –
Ian Mausner emphasizes that every investment involves some element of risk. The return on an investment is the financial gain or loss that results from investing in an asset. The amount of return that an investor receives depends on the level of risk associated with the investment. Generally, higher-risk investments offer higher potential returns, while those with lower risks provide more modest returns.
It is important to remember that past performance is not necessarily indicative of future results. Just because a particular investment performed well in the past does not mean it will continue to do so in the future. An investor must carefully consider all factors before making any investment decisions.
Types of Risks
Systematic Risk: This type of risk is inherent in the market and cannot be diversified away. Examples of systematic risk include factors such as economic recessions, inflation, interest rate changes, and political instability. Systematic risk is also known as market risk and is beyond the control of individual investors.
Unsystematic Risk: This type of risk is specific to a particular security or company and can be diversified away. Examples of unsystematic risk include factors such as company-specific news, industry-specific news, and macroeconomic news. Unsystematic risk is also known as non-market or specific risk and can be managed by diversifying one’s portfolio across different securities and industries.
Relationship between Risk and Return
The relationship between risk and return is often described as a trade-off. Higher-risk investments generally offer higher potential returns, while those with lower risks provide more modest returns. This relationship is not always linear, as there exist multiple factors that may affect it.
One factor that can affect the relationship between risk and return is the time horizon. In general, investors with longer time horizons can afford to take on more risk because they have a greater ability to weather short-term market fluctuations. Another factor that can affect the relationship between risk and return is risk tolerance. Risk-tolerant investors are typically willing to accept more risk in exchange for the potential of higher returns, while risk-averse investors are generally more concerned with the preservation of capital and are willing to accept lower returns in exchange for less risk.
Bottom Line
Ian Mausner points out that it is essential to remember that there is no guaranteed relationship between risk and return. Just because an investment has a high level of risk does not mean it will also have a high return. Similarly, just because an asset has a low level of risk does not mean it will have a low return. An investor must carefully consider all factors before making any investment decisions.