Each investor, whether institutional or an individual, will have a very different outlook on risk reward ratios and no doubt a different long-term goal. This is an area of investment where there is no one size fits all and you need to have a clear strategy for your own investments to suit your specific situation. So, how would you go by balancing the risk reward ratio?
What are you looking for?
The risk reward ratio is simply an indication of a potential reward in exchange for taking a potential risk. People will use different terms, quote complicated formulas but it is quite simply a measurement of the potential reward compared to the potential risk you are taking with your money. Day traders are the ultimate risk takers but these are not individuals who simply throw money away without a thought. They will still study the risk reward ratio and if the figures stack up then they may invest. If the potential risk does not justify the potential rewards then they will look elsewhere for their next investment.
There is no doubt that day trading does carry additional risks, because of the very short-term nature, but do not automatically assume these traders walk into trades with no research.
Planning for your retirement
The idea of planning for your retirement encourages the idea of passive investment and less risky positions. However, if you have for example 10 years before you retire then it would make sense to be passive in your investment strategy but what happens if you have say 40 years before you retire?
While it will depend upon an individual’s personal situation there is every chance that somebody investing with 40 years to go before retirement would put some funds aside for “more speculative investments”. There could be a core investment in passive/long-term stocks and a small element of more speculative investments offering the opportunity to beat the general market. What we tend to see is a reduction in the risk profile as somebody nears their retirement age as they will need a little more certainty about what funding will be available upon retirement.
Institutional funds
If you check the institutional funds market you will literally see it has something for every occasion, every country and every risk profile. Whether you are looking at more speculative investments, long-term passive income or perhaps you want a mixture of the two, you will not need to look too far. The institutions also have an array of research and financial models available to them which takes some of the risk away from investment – but not all, because without risk there would be no return!
When you think about it, if you take a top-down approach, the worldwide economy will dictate individual country economies, within this there will be different performances in different areas of the country and different sectors will move in different directions. It just takes one of these factors to move significantly to have a knock-on effect further down the line. This is why no investment is ever risk-free – you need to consider the risk factor and potential rewards and match these with your own specific requirements. Also remember, you can change your risk reward profile at any stage……