How to Balance Risks and Rewards

1. How to balance risks and rewards? We all seek certainty in all things we indulge in, don’t we? From being sure that the taps won’t be dry early in the morning to having no power outages during the summer. It makes sense as it helps in our day-to-day scheduling and sticking to the plans we make for the day. Why choose to be closer to being uncertain when you can be very sure of things?! If we apply the same set of thoughts to investments, we can draw some interesting insights. Evolving meanings of investments and risks Older millennials and baby boomers expressing their fear and lack of taste for anything other than govt bonds, FDs and gold is not a new thing. Of course, the purpose and meaning of “investments” have evolved with time from ensuring survival to running after high yield. Doing anything out of the ordinary, in any walk of life, was akin to taking risks a few decades ago. Doing something that others didn’t involve themselves in with money or investments meant the same as flushing them down the drain for nothing. But today, people have understood the fact that more risks mean they have the opportunity to earn more rewards as well. Balancing risks and rewards If we ask ourselves the fundamental question of ‘why we invest?’, we will find that it’s normally to be capable of buying a house or kid’s education or for a comfortable retirement life. But, there’s no free lunch available for anyone. We get more than what we give only if we are ready to take some weight of the risks on our shoulders. Most applicable in the world of finance. It makes no sense to take risks when the outcome doesn’t justify the risks involved. Why take the chance of putting one’s hard-earned money at risk?

2. Risk not taken = lost opportunity? It’s basically a trade-off between risk and the opportunity to earn that above-average returns. But, if one considers the outcomes of avoiding an investment that offers higher returns but carries more risk and going ahead with the investment while being aware of the risks involved, the difference will be quite apparent. In case of things going south, there will be an opportunity cost: One will lose out on the less-risky returns that could have been made during the time it takes to recover the lost investment. Certainty is good Unlike the popular perception that ‘a bit of risk is necessary in life’ and the like, that ‘bit’ won’t take long to creep into one’s investment decisions by overriding the rationale. Of all the things one can control, choosing to be certain about anything is better than taking a pinch of risk for the sake of it. It is a smart thing to not take a risk when there is a lack of understanding and a wise thing to not risk For those who understand that taking unnecessary risks is not worth a penny and would rather choose fixed income over exciting and volatile investment products, you can visit our platform here to explore multiple high-yield fixed income investment opportunities.