Probably the most important equation in the investment game is the return to risk ratio. Some people like to call it the risk to return ratio, but whichever way you want to think about it, really isn’t important. What IS important is understanding how these two pieces fit together. Most people haven’t got a clue how to measure the risk of an investment that they are planning to buy; they also have no idea about the return to expect.
So, if you think about it, it’s a pretty crazy decision. It’s basically a gamble, which is why most investors lose (or certainly don’t make as much as they should).
Imagine walking across the road and not knowing the risk of doing so (getting run over by a car), or the return (getting to the other side of the road).
That’s what a toddler would do. They don’t understand the components. And if you apply the same principle, then the stock market is full of waddling toddlers crossing a busy M1 Motorway. Thankfully it’s only their stock portfolios that are being crushed and not their skulls.
The good news is that if nobody else around you know how to measure risk or return, then you can get a huge advantage just by learning. However, this is not a straightforward process and requires a bit of analytical work/knowledge on various factors like beta, volatility etc. So that’s another video for another day.
Instead let me give you a simple short cut that you can start using today.
The largest capitalisation companies in the market have the least amount of risk. However, due to the share price, they also don’t have huge price movement potential, which is a big disadvantage. On the other hand, a penny share trading at 20p has the potential to reach 40p by the end of the week, a 100% return on capital. In this case the disadvantage is that it comes with a lot of risk.
In this week’s video I show you how to combine the best of both worlds; we get the advantage of a large, market capitalisation stock coupled with the advantage of a small, priced share.
And BOOM – a staggering 35% return in just 4 days is the result!
MP3 Version: SMS 71
Risk Disclaimer
The Private Investors Club is not regulated by the Financial Conduct Authority. The information on this site is not investment advice and is for educational purposes only. The value of your capital is at risk so speak to your advisor before investing.