How to Align your Portfolio With Your Personal Investment Goals | Risk Vs. Safety | Investment & Finance Education | SprinkleBit | SprinkleBit Education
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Chapter 4 — Risk Vs. Safety
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Risk Vs. Safety

Risk. Sometimes we shy away from it; other times, we are willing to face it head-on. 

Whether you think of risk as something to be avoided or measured carefully, in the context of investing risk can be defined as:

The probability that the actual return of an investment is different than the expected return on the investment (including the possibility that the investment will lose value).

Actual return: The percent gain or loss in value of an investment that actually occurs when the investment is made.

Expected return: The percent gain or loss in value of an investment that an investor believes will occur before making the investment. 

Blue Chip Stocks vs. Smaller Public Companies

If you are a first-time investor, one of the things you'll want to consider is the relative safety of different types of investments. For a long time IBM was considered the premier stock to own because it was the most consistent performer. In more recent years however, Apple has emerged as the most easily recognized and respectable company.

We call companies like these "blue chips" and generally think of them as being able to survive an economic downturn and consistently grow in value. 

Blue Chips:  Shares of an established, financially stable company with a well-established product or service.

On the other hand small companies and companies with new unknown products can offer much larger percentage gains, but also carry significant risk of losing value.

 


"As a general rule, to earn higher returns, you have to take greater risk. While the least risky investments generally have the lowest returns."


Quiz

Tommy is a wealthy individual who wants to earn even more with his money. He can afford to lose his investment and is looking for a high return. What type of investment is Tommy likely to make?

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  • 1
    Apple since it is a rich company—just like he is.
  • 2
    Netflix—because he likes movies.
  • 3
    A savings account, because they are stable and safe
  • 4
    A small pharmaceutical company with a new drug that either cures cancer or causes a rash
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Alex's thoughts: 
When an investment's actual return is larger than its expected return you get what the suits call an Alpha. This is what all hedge funds are chasing. 

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