Unpredictability and investment strategy
A lot of different investment strategies exist, but all these investment strategies have their roots in two main strategies. These main strategies are based on two extremes: assurance and making the highest possible profit.
People invest to make the highest profit that is possible, but for a large part of the investors, assurance means a lot to them. This assurance involves the preservation of capital and the possibility to earn some extra money above the current interest rates.
Making the highest profit possible should speak for itself. It involves making the most money possible, regardless of the risk.
Between these two extremes, a lot of different investment strategies have arose. In these investment strategies, assurance and maximizing the profit have been mixed.
Place your bets
Nobody can advise you what the best investment strategy is for you to use. This depends for a large part on your risk appetite, the degree of risk that you feel comfortable with. Besides that, the choice of investment strategy also depends on how much money is available for investing. And last but not least, the goal that you would like to reach with the investment influences the choice of your investment strategy.
If your goal is to get a certain absolute return on your investment, than this can be achieved by both of the extreme investment strategies. If a strategy based on assurance is chosen, you should be prepared to invest a larger amount of money. An investment strategy based on assurance, will also be based on a lower percentage yield. The advantage of such an investment strategy is that the result will not differ a lot from the initial goal. Of course there is always a chance that the return is negative.
If you choose to invest a small amount of money, but your goal stays the same, you should be prepared to take more risk. With more risk, the expected return should be higher. The chance that you completely miss your goal will also be a lot higher.
Different risk products
So, taking more risk can result in an higher profit. But always take your time to determine the risk in investment products. So before you invest your money, inform yourself in the best possible way about the risk. Be aware that investing always entails risk, no matter the product you invest in.
Investment products can entail the following risks:
- High risk investment: chaos. This type of risk can be both good and bad. Most investors will think these products do have a high risk, which makes the price lower. Both the advantage and the disadvantage is that small events can have an high impact on the price of these products.
- Risk free investments: stable equilibrium. Actually, there are no risk free investment products. But there are investment products that have a 95% to 99% sure result. So the outcome is pretty sure, but the profit will not be high. These products are usually more expensive.
- Apparent risk free investments: unstable equilibrium. These investment products look like they are risk free, but they are not. History proves that apparently save companies can fail.
Only after proper investigation into the investment risk of the investment product, you can tell of which risk category the investment product is. After this research, you can decide whether you want to take the risk.
As previously indicated, small events can have a major impact on the price of an investment. But how can you best take advantage of this unpredictability? Some tips to take advantage of unpredictability of investments.
- Identify uncertainties and determine whether they have a positive or a negative impact. Some events can cause loss, others generate an extra profit. Make sure you are exposed to uncertainties that have a possible positive outcome and minimize exposure to uncertainties with an expected negative outcome.
- Invest in preparation, not predictions. Do not attempt to predict the exact outcome of uncertainties, because you always miss other uncertainties (both positive and negative).
- Take each opportunity or anything that looks like a chance. Many people keep opportunities untouched because they think the opportunities will come by some other time. Most opportunities are once in a lifetime opportunities.
- Beware of plans of governments. The government always tries to predict the future, but that's impossible. People working in the public sector are also just trying to survive, and they are equally equipped to make predictions as other people.
- Do not waste time fighting forecasters. Take the good ideas of the gurus and ignore the bad ideas.
All previous recommendations have one thing in common: try to take advantage of uncertainty as much as possible. Make sure you are prepared for positive and negative events. You will never know the actual event before it happens, because these occurrences are uncertain.