The folly of chasing returns

One of my favorite definitions of investments is this—“The commitment of funds made in expectation of some positive rate of return. If the investment is properly undertaken, the return will be commensurate with the risk the investor assumes.”

Whenever people invest, their primary concern is almost always the return. It is obvious that we should be concerned with returns, as I have never met anyone who invested and expected no return. However, returns are not the only thing you need to be concerned with. Even prior to concerning yourself with returns, what you may want to look at first is the risk. After all, returns are, in a great way, a function of the risks that you take. Many people would want high returns but might overlook the inherent risks those returns will bring. One of Warren Buffet’s famous quotes says “Never test the depth of the river with both feet.” Such a wise reminder.

Before committing yourself to any investment, it is important that you know what the risks are. To this date, the principle of risk and return trade off still holds true and time will not change that despite the ostentatious claims of some investment experts—“high risks, high returns; low risks, low returns.” Investment risk can be defined as the probability or likelihood of occurrence of losses relative to the expected return on any particular investment. Stating simply, it is a measure of the level of uncertainty of achieving the returns as per the expectations of the investor.

When you begin to chase returns, there is a high possibility you may begin to be desensitized to the risks that you take. The lure of big returns has fooled many unwise investors into losing more than their shirts, so to speak.

Further and before you begin investing, make sure that you are building a solid financial foundation. Here’s my 2 cents on such a foundation:

1) Manage money well—Save as much as you can so that you will have margins that you can invest. People are easily lured into making investing mistakes because they want to get very good returns from investing very little amounts.

2) Manage your debt—Most debt, especially consumer debt, will charge you rates that are much higher than investment returns. It doesn’t make any sense to get a 12-percent-a-year return on your investment and yet pay a 36-percent-a-year interest on your credit card balance.

3) Build on your emergency funds—Since life can’t be devoid of emergencies, you need to have a source ready when it comes. Before you touch your investments, exhaust your emergency funds first so that your investments can be left alone to grow.

4) Get insured—If there are people dependent on your income, you may want to protect them first before investing.

5) Know your goals— Investing is all about achieving your goals. Knowing your goals, determining your time frame and investing according to your risk tolerance are the most prudent things to do in investing.

Go ahead and invest, it really is a wise thing to do.

But make sure that as you invest, you fully understand the risks that you are entering into and that those risks are acceptable to you. Craft a prudent investment strategy and do not chase returns, you may find yourself falling off a cliff.

Learn investment strategies from the country’s most empowering investment conference—#iCon2017 this May 27, 2017 at the SMX. In this year’s conference, I will be joined by the country’s leading experts like Marvin Germo, Rex Mendoza, David Leechiu, Carlo Ople and many more. Visit www.bit.ly/ICON_2017 for details.