What is your risk/return profile when trading or investing?

Maybe you have a low-risk approach towards your long-term pension planning, especially if you’re close to retirement. But with a separate pot of money, perhaps you have a higher risk/reward attitude for buying that boat or Lamborghini in the shorter-term.

Of course, doing almost anything in life has a risk / reward ratio. Indeed, not doing anything also has a trade-off. There are many days I have this debate before getting out of bed, for example.

Generally speaking, low risk means you should expect a low return and vice-versa. In investment terms, taking a low-risk approach could mean expecting a small and sometimes even slightly negative return (e.g leaving your money in a savings account vs the current rate of inflation). It does mean you heavily reduce your chances of large losses – But also of large gains.

Allowing inflation to erode the real value of your money (ie Inflation Risk) is a big risk of doing nothing with your money. And with western governments arguably being forced to embrace aspects of *MMT, many commentators are concerned that the risks of inflation could be high in the not-too-distant future.

Any investment advisor worth their salt can help you assess your risk tolerance and discuss what return you should expect (over the long term) from the market and an appropriately diversified portfolio.

In effect, they are helping you measure how much volatility you can emotionally take before you decide to sell, at the worst possible time – and invariably at a loss. However, the other side of that coin is what return you need, or indeed ‘want’, from your money. If these two sides of the risk/reward ratio don’t agree, there needs to be some compromise.

Finally on the point of Risk – Most pilots are human, therefore you suffer from many cognitive biases. One bias particularly attached to investing is ‘Risk Aversion’. In short, it is an irrationality found in humans when it comes to calculating risk.

Another bias relevant to trading is the bandwagon or ‘herd mentality’ effect (have you seen the price of Dogecoin lately?). This is why many inexperienced Retail (ie non-professional) traders / investors lose money in financial markets. They see the price of an asset going up (they might have even heard about it from the Airport shoeshine boy) and they buy in the hope of catching a price increase. However, in many cases the market is over-extended by that point and falls back after the late comers to the party have arrived. The price continues to decline before the inexperienced Retail Trader cuts their losses and sells – And guess who they’re selling to?

At Line Trading Pilots we aim to educate you on both long-term investing for capital growth and short-term trading for income generation. Even though both practices may have similarities, for the Retail Trader / Investor they are poles apart. Yes both involve trading securities, but the big differences lie in the area of risk/reward ratios and time horizons.

If you wish to make money from active trading, it takes many hours of studying, practice, mentorship and on-going work. But the rewards are there if you’re prepared to put the work in.

And that’s where we come in. We will help you analyse the risk/reward ratio of actively trading Forex (or other large volume securities), whilst balancing that out with your long term plan.

*We will cover MMT along with other economic theories in a separate blog

Homework
What asset is generally considered the risk-free return? Would that be ‘risk free’ for you?
Do you know what the low, medium and high-risk asset classes are?
What assets are considered traditional hedges against inflation? Is that changing?

For all the answers and more, register your interest at Line Trading Pilots.com