It is not uncommon for the true meaning of risk vs reward to be overlooked or misinterpreted for any number of different reasons. Usually, this involves basing return expectations off of one’s perception of risk, making it more difficult to accurately determine which investments will actually build smart capital. When you are investing for something important, such as for the future of your family, it is important that risk vs reward is properly accounted for, and that any misconceptions about return expectations are cleared up before the investment is made.
Take this quote from Howard Marks for example, that Noah Murad of Mill Street & Co references in his second Perspectives piece, “If riskier investments were counted on to produce higher returns, they wouldn’t be riskier.” In other words, the misinterpretation of risk vs reward comes from the idea that there is a target return, and that higher amounts of risk necessarily mean greater reward.
While this may seem logical at first, it is actually the case that ‘less risky’ investments are still able to produce high returns that help build smart capital – whereas ‘riskier’ investments are similarly capable of producing only a mediocre return. In terms of investing for the future of your family, knowing how risk vs reward actually affects your interpretation of potential returns is crucially important.
The truth is there is no concrete way of predicting the return of an investment, and avoiding any risk with the hopes of a stable return often seems ideal when it comes to investing for family. However, even in the case of a fixed income security for example, there is still the risk of losing your investment, even though they are often considered a ‘safer’ investment. In other words, this means that the reward is limited but the risk is still present. Even though investments with smaller returns such as securities can appear to have no risk, the danger of losing your investment is still present – and this should be accounted for when investing for family. After all, every investment carries inherent risk.
Certainly, it can be fairly daunting to look at future expenses such as university fees or the cost of raising a family in a city like Toronto, however with a proper interpretation of risk vs reward, the pathways for building smart capital become less volatile and more obvious. For when you make an investment for the sake of family, the expected or target return should not be the deciding factor.
Instead, you should try and obtain an appropriate assessment of the investment’s risk vs reward, and avoid being caught up in what the ‘target’ or ‘expected’ return is. After all, if a riskier investment is likely to make a formidable return, then it doesn’t seem sensible to keep labeling it as risky. Certainly, risk vs reward can help provide you with an idea of an investment’s potential, but basing a decision solely around your desired returns can lead to rushed or highly volatile investments.
For Noah Murad, the CEO of Mill Street & Co., Family is a core value; and he believes that making investments to better the life of one’s family is an important decision and a noble pursuit. For this reason, he believes that return expectations and their ability to alter a person’s investment decisions should be recognized and accounted for properly, before any steps are taken towards building smart capital on behalf of family.
Just like determining risk tolerance, self-honesty is important when investing on behalf of family. For a family in Toronto for example, it would be prudent to address future expenses and needs in an honest manner – such as taking rising housing or education costs into consideration. By doing so, it helps you to avoid falling into the trap of expecting a specific return from an investment, making it easier for you to view risk vs reward in a more level-headed and sound fashion.
At Mill Street & Co., Family is one of the core values that the CEO Noah Murad holds in high regard, and believes that it is an important factor involved with building smart capital and living comfortably in a city such as Toronto. If you would like to learn more about risk vs reward and how it affects investments of any kind, Noah Murad has written about this topic in great detail in his Perspectives No. 2 piece, which is accessible on the Mill Street & Co. website. Also available on the website is an online knowledge base that is dedicated to helping individuals build smart capital, manage businesses, and invest intelligently within a modern context.