Investment Tips and Return Concepts

Savings and InvestmentsArticleDecember 21, 2022

Investment plays an important role in financial planning. However, while making profits through investments, investors may also face the risks of loss. As investors, it is necessary to understand the relationship between risk and return, then select the most suitable investments according to different risk profile levels.

For now, let’s begin with the simple concept of risk and return, then understand common asset classes in the market. This helps you achieve your financial goals step by step!

investment-risk-and-return

What is risk?

In short, risk is the uncertainty in certain situations. For investment, risk generally refers to the changes in the rate of return on an investment. This movement can be calculated in different ways, including volatility, which represents how rapid and how much an investment's price rises or falls over a period. When the price rises and falls rapidly in a short period of time, it is a high volatility; and if the price remains unchanged, it is a low volatility.

What is return?

Risk and return are closely related. In general, the higher the risk, the greater the potential return (or the loss). Since different asset classes have different risk and return ratios, investors should carefully choose the most suitable investment for themselves according to their financial goals and risk profile.

Common asset classes

Derivatives: The riskiest category which is highly-leveraged and with relatively higher returns.
Equities: Traditionally riskier asset class, which can offer relatively high returns if investors can withstand short-term price fluctuations in stocks.
Cash: Low risk and stable, but the return potential is relatively low.

To learn more, please refer to the table below for the asset classes’ risk and return profiles in general.

Cash

Including bank saving and Certificate of Deposit
The main return source is the fixed deposit rate return

Relatively low risk*,

guaranteed to get back the principal

Bond

Bond is also known as debt securities, represent loans issued by governments, private companies or public institutions
Bond will have fixed dividends and the principal will be refunded upon maturity
Bond prices are sensitive to changes in interest rates, when interest rates fall, bond prices rise

Relatively low risk*

with fixed interest

Fund

Fund is a tool that gather multi-investors’ fund and invests them into different assets or projects, such as stocks, bonds, money market tools and other assets
Investment decisions are handled by fund managers, which can save research and management time
Diversified investment

Risk and return depend on the investment objective and investment strategy of the fund which may be higher or lower

Equities

Equities are also known as shares, buying shares means owning equities in a public company
The company's revenue performance will affect the change of stock price, which reflecting investors' outlook and expectations on the company's operating performance
Provide potential capital appreciation and dividend income
Free trading with high mobility

Relatively high risk*,

return is uncertain

Derivatives

Derivatives are any financial products whose value is derived from the underlying asset. Its value depends on one or more underlying assets, which can be financial assets such as equities, bonds, currencies, or commodities or precious metals such as gold and crude oil
Derivatives are often heavily leveraged

Relatively high risk*

* The returns of each investment class vary according to the investment risk.
In general, the higher the risk, the greater the potential return (or loss).

Calendar year returns by asset class (% per year)

Source: BlackRock Think Tank, MSCI U.S. Indices, MSCI Emerging Markets Indices, Bloomberg Barclays U.S. Treasuries Data, S&P Global Property Investment Trust Index, data as of May 3, 2021. 2021 return performance as of April 30, 2021

Diversified investment

Diversified investment strategy is to form a portfolio of different asset classes to reduce investment risk. While the value of individual assets may fall, the chance of a simultaneous decline in all asset classes is low. Diversification allows investors to seek more opportunities for investment growth. Basically, multi-asset allocation means "Don't put all your eggs in one basket".

While every investor's investment portfolio is different, it is important to maintain diversification regardless of your financial goals, age or risk profile. The goal of diversification of assets can be achieved by investing in different asset classes. Key asset classes including:

Cash or money market;
Bond or fixed income investments;
Marketable securities, i.e. company shares or shares;
Alternative funds, e.g. real estate, commodities, hedge funds or private equity. These asset classes can be distinguished by geographic location, industry, investment style and size of the company invested.

Different asset classes have different long-term performance, so risk and return are also different. The most important thing in diversification is to know how to invest in different classes of asset. Since the market conditions of one asset type have a lower chance to affect another type of assets, it helps to reduce investment risks.

Disclaimer

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