Profitability and risk: How are they related in investments?

If you are interested in investing, profitability and risk are important factors when making a decision. Therefore, we tell you about these concepts and their relationship in investments.

What are they?

Before talking about the return-risk binomial, it is necessary to know what each one means separately.

  • What is profitability? Securities attorney defines it as the benefits obtained or that can be obtained thanks to an investment.
  • What is the risk? The same source explains it as the uncertainty or lack of certainty about an action or process. It applies in any field, including in the results of an investment.

In short, while the return is what you could earn by investing, the risk is the possibility that the results will be adverse or not so favourable.

How do they relate?

All investment is made in search of profitability, but in turn, there is no investment without risk. Therefore, as BBVA points out, there is an inverse relationship between risk and potential return for any savings and investment alternative, where,

  • The higher the expected return, the higher the risk would have to be assumed.
  • The higher the level of risk, the potential return should be higher.
  • If the risk conditions are the same, the ideal would be to choose the investment alternative with the highest return potential.
  • If the profitability conditions are the same, it would be convenient to take the least risky option.

Investment profiles according to the level of risk

Normally, you seek the highest return for your investment; however, as return and risk go hand in hand, it is recommended that your expectations be adjusted to the degree of risk that you are willing to tolerate.

In this sense, Management identifies 3 main types of investors:

  • Aggressive: They accept high risk, as long as the possible gains are high in the long term.
  • Moderate: They are more cautious when investing, although they can take some risks to maximize their profits in the medium or long term.
  • Conservative: They prioritize security, so they prefer a minimum return in the short term as long as the risks are almost non-existent.

If you want us to tell you more about the differences between investing in the short and long term, you can read this note.

Fixed income and variable income

Fixed income and variable income are types of financial instruments that determine the level of risk and the possibilities of return of an investment. They are characterized by the following:

  • Fixed income: Its possible return tends to be lower than equities, but it is more predictable and low risk.
  • Variable income: There is greater risk and uncertainty since its profitability could be high, moderate or it could even register losses.

How to manage your personal finances? Plan your income and expenses

 Create a budget with detailed information about your income and expenses. This way you will prioritize what you need (food, health, etc.) over what only generates pleasure (entertainment, junk food, etc.). The idea is that at the end of each month you have surpluses that allow you to save.

If you need to use your credit card, an Elder fraud attorney, an expert in finance and fraud in finance, recommends using it for day-to-day expenses and leaving it at zero when the payment date arrives, because that way you would save interest

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