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Risk vs reward

Do you consider yourself a risk-taker? 

Often, the term ‘gambling’ is incorrectly attributed to putting your money to work in the stock market. A sensible investor does their homework before deciding they believe a company is underrated, looking at the fundamentals, past performance, potential ‘moats’ and all the underlying details you’d expect any good Fool to research! 

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But I’ll concede there is always a level of risk connected when you invest, as there’s no such thing as ‘guaranteed returns’. (The same can be said for keeping your money in, say, property, with constant threats of a housing bubble.) And it may sound obvious, but you’re likely to only get as much reward out of an investment as the amount of risk you put into it.

Ultimately, it often comes down to why you’re buying shares in the first place. Younger generations tend to lean towards higher-risk investing because, simply put, they have more time to correct any ‘mistakes’ on their path to wealth creation; meanwhile, those approaching or in retirement have a tendency to ‘play it safe’ with low-risk stocks in order to gradually supplement their pension pots.

I recently went to a restaurant where your food choice was determined by the level of risk that you apply to your investing decisions. The ‘Click and Investaurant’ pop-up — launched by Investec, to highlight its new service offering intelligent advice specific to each investor — opened the eyes of the general public to the ‘risk vs reward’ dynamic that investors face on a daily basis: “the gains could potentially be huge at the highest end of the risk scale… however, similarly, I could get burnt”. (Not literally in this case; rather than heaping chillies onto the ‘very high’ risk meal, we were instead treated to a delicacy of crocodile fillet and crispy crickets… those that had the lowest risk appetite were presented with squid-ink cod & chips, while the mid-range were brought rabbit crumble and wild game pie.)

So, as an investor, you’re inherently a risk-taker regardless of whether you play it safe and concentrate on low-beta shares or roll the dice and target stocks which are currently unloved by the market.

As mentioned earlier, investing is a very personal experience, and it’s up to each individual to determine what’s appropriate for their end goal!

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