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Risk and reward

Introduction| Course| Q&As | Recommended reading| Quiz | 34210002

2. The golden rule

The golden rule of the stock market is that the higher the return you want, the higher the risk you have to take to get it.

• If you are determined to double your money in a couple of months, there's probably no point investing in a blue chip. You have to invest in a growth stock, probably a small company in a 'hot' area, which is just as likely to halve in value as double.
• If safety is paramount, you need to spread your money across a range of blue chips, or invest in a collective fund that does that, or in a tracker fund that is guaranteed to match the index but will never beat it.

Risk and reward go hand in hand.

The good thing is that you can choose shares to achieve the balance you want. It's a bit like buying a car, where you have the choice between spending your money on performance features (engine size, turbochargers, low profile tyres) and safety features (air bags, crumple zones, theft alarms).

So with sharepicking: You can invest your money in businesses that emphasise performance or in businesses that emphasise safety, or somewhere in between.

Example

Huge Food Co. v.	Risky-Tech.com
Well-known brand name v.	Small and entrepreneurial
Stable position in the market v.	Make or break proposition
Consistent customer demand v.	Technologically led
Good dividend and earnings record v.	No dividend or earnings record
Strong balance sheet v.	No assets

The relative comparison of safety versus performance

The difference between companies and cars is that a Volvo is safe and an Aston Martin is fast, but there's no way of knowing for sure that Huge Food Co. is safe and that Risky-Tech.com will be a roaring success. What you see is not always what you get.

1. The right place for your spare money? 2. The golden rule 3. Stock market performance and inflation 4. Stock market performance compared to savings accounts 5. Specific risk 6. Market risk 7. Pound cost averaging - a way round risk 8. Overseas investments - currency risks 9. Conclusion

Recommend Reading

• Against the Gods

 

 

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