One of my Finnish blogging friends shared this interesting graphic on one of their most recent posts …
The implication is clear:
The best investments …
… in fact, the ideal investment is one that maximizes profit at the lowest possible risk.
Whilst that is ideal, the real world – at least in my opinion – doesn’t work that way.
– You may not understand the investments that maximize profit at the lowest possible risk
– You may not have access to the investments that maximize profit at the lowest possible risk
In fact, the operative word here is ‘you’ …
… unless you are professional investor, who has access to – and understands fully – all of the investment choices available, you will not be able to surf the ‘efficient frontier’:
Because of access and education you may only be able to select from a few investments that, if you are lucky and choose well, approximate the efficient frontier, as represented by the four dots in the chart, below:
In this case, you have lucked out!
Two of your investments have hit the efficient curve smack on, and one is optimal (i.e. best combination of risk/reward), whilst the other will suit the most risk-averse amongst you, as it is efficient, yet carries the least risk (of course, it also produces the lowest return of all the ‘efficient’ choices available to you).
… and, where I think most (but not all) of you should like to position yours, as well.
It’s not optimal (higher reward, more risk); probably not even efficient; but, ideal … at least, for my (our?) purposes!
Any idea why?
Why do you think I actually like to assume more risk?
I’ll do a follow up post; in the meantime, I’d like to hear what you think my reasoning will be?
I might even send a signed copy of my book to the person with the best (not necessarily correct) answer 🙂