Higher the risk higher the return

Higher the risk higher the return

The above statement is what is very common when one evaluates for investment . It is said that when you want higher return you should take higher risk but it is also said that it is not necessary that when you take higher risk you are sure to get higher return . Many investor get confused with this . Some even start thinking if there is not surety of higher return when I take higher risk then why I should take higher risk.  

First we need to understand what do we mean by risk. For a common man it mean loss or chances of negative return . But risk in investment means uncertainty in expected return  . In other words if there is more probability of getting expected return it is less risky and if there is lesser probability of getting expected return it is more risky .

So Probability factor becomes a very important measure for risk. What are the factors that affect the probability – nature of asset , nature of security , time , economic factors, market dynamics, people expectations  etc

Most Indians refrain from investing in Equities as their understanding about risk from equities is not correct . They think it as stock price , indices only . These price and indices are symbolic representation at any point of time whereas equities are in larger terms linked with people growth aspiration ,better living aspiration . These leads to demand for creation of more and quality product and services by some or the other companies or industries . This will lead to valuation , revaluation and new price discovery of stocks and rise of indices . The constant valuation, revaluation and price discovery leads of volatility in short term but in long term quality always dictates its term and any investment in such equities lead to  much higher return. So when we say higher the risk it implies the tolerance level and patience level in short term when there is volatility . If selection of investment in good company is done then good return will come soon and later .

Some can argue what is there is economic slump ( like recession in 2009 ) . Yes there might be negative impact on return may be of some months or up to few years . But again if you believe in law of nature then again not to worry . We have seen even after the worst of cyclone , tsunami when the whole village or town is destroyed first nature cools down and people again work hard to restore lives and infrastructure back to normalcy or even better . So always remember there is one truth of this whole world – everyone strives for growth and betterment . All nations, all economies , all corporate , all individuals all want growth and so the economic slump will not last forever and growth will come sooner or later as growth again is linked with our aspirations and better life which is through some products or services and investment in the equities of those companies will ALWAYS give you a higher return .

So we can say higher the risk tolerance ( showing patience by staying invested and not getting affected by volatility ) in short term but invested in good quality equity ( i.e stock of those companies which are producing good product in demand ) there is ALWAYS a higher return and no risk of losing in long term.