How to Decrease Risk & Increase Return Part 1

Warren Buffet

We talked in a previous post of the definition of risk as “the probability of losing money.  Using this definition the next question becomes “how can we decrease our probability of losing money while increasing our returns.”  Please note, that according to this definition the lower the probability of losing money the greater the probability of making money.  However, we need to factor magnitude in there, in other words how do we simultaneously decrease the chance of losing money and increase the magnitude of money we make?

Anyone can decrease their risk by going into an insurance product or insured investment; say buying a GIC or Canada Savings Bond they can avoid losing money in most cases.  The trick is how do we also get high returns?  Certainly not in a GIC, Canada Savings Bond, or Insurance product, at least certainly not in today’s markets.

The first method takes work; I don’t believe there is any escaping this basic fact as we pursue higher returns and lower risks so here it goes.

Invest in things you understand.

To illustrate the point consider driving in a car.  If you are going to drive from your house to your place of work what is the probability you’ll get into an accident?  Relatively low.  Now consider having your 12 year old son drive your car from your house to your place of work, what’s the probability he’ll get into an accident?  Relatively high.  What changed?  The route was the same, the conditions were the same, the car was the same but in one case it was very risky, in another it was not, the difference was just the driver, specifically, the skill level of the driver.

The same is true in investing.  Your chances of losing money investing with Warren Buffet are less than they are if you are investing with your 10 year old son.  Why?  Simply because Warren Buffet is very skillful at investing, he understands it.  If you want to get good returns you need to learn about what you’re investing in, that will allow you to identify risks and avoid them, it will also allow you to pick winners.  In investing like everything else one thing remains true:

There is no protection from ignorance.

If you don’t know what you’re getting yourself into you can’t protect yourself from it.  This takes discipline, a friend of yours might come along and say “hey, I’ve got this great investment” and it will be something you don’t understand, what should you do?  DON’T INVEST!

If you’re going to invest in stocks you need to understand stocks, you even need to understand the type of stocks you’re investing in.  If you want to invest in real estate you need to understand real estate.  This isn’t easy, it takes a long time to learn a field well, you’ll generally make mistakes along the way.

Bottom line if you want to expand what you’re investing in you should first expand your knowledge into those fields.  If you want to get better returns with lower risk you need to first deepen your knowledge and investing skills in those areas.

If you’ve got investing questions you’d like to discuss or like us to cover please click in the lower right corner of the screen to send it to us, looking forward to hearing from you.

Continued on next part

​Where Are You In the Wealth Journey and What’s the Highest Impact Objective For You Next?

Wealth Scales Map

If you liked this article and would like to receive more like this each time we post, enter your name and email address:

Readers like you were interested in these programs:

Your Breakthrough Marketing Review
Profitable Sales and Marketing Machine
Facebook Ad ROI Training
Campaign ROI

We offer personalized one on one assistance.
Want help?

I want help with marketing
I want help with team
I want general business help
I want help with investing
I want help with money management

Other Popular Programs:

The Greatest Business Course Ever
Scale ROI
Team ROI
How To Become Rich Mini Series