The Importance of Balancing Risk and Return

Posted on June 8, 2016 by

Paul RossanoDeal structuring is hands down the most important skill to learn when it comes to creating success as an investor, but what exactly does that mean? Well, it basically means arranging your financing in such a way that you have the proper balance between RISK and RETURN.

I’ve been a full time investor for over 15 years and I’ve taught “The Wealthy Code” to thousands of investors all over the country, and the reality is most investors know how to measure their return on investment (ROI), but very few understand how to measure RISK, and therein lies a HUGE problem.

Why is not understanding how to measure risk so significant? Well, let’s imagine these 3 scenarios. 

  • You’ve managed to save $50,000 and are ready to invest it.
  • Your 75 year old Aunt Jane worked her whole life to save $150,000 and she’s willing to invest her entire life savings into one of your deals.
  • Warren Buffet is willing to invest $150,000 into one of your deals and he wants the highest return possible with very little concern about losing the money.

Would you treat these investments differently? I sure hope so! You would obviously want to put your money and your Aunt Jane’s money into much safer deals than Warren Buffet’s money, but how do you do that?

First, you have to understand how to measure RISK and RETURN, and then you have to know how to adjust them too!

Once you understand how to measure and adjust both risk and return, you’ll also understand how to put your money and other people’s money (OPM) into the right deals.

(Whether you realize it or not, what you just read is vital to your success as an investor, so you might want to read it again.)

Why is this so important? Let’s look at potential outcomes for scenarios 1 and 2 mentioned above.

Scenario 1:

You invest all of the money you’ve saved ($50,000) into a deal and lose it. What is the cost of this negative experience?

The obvious answer is you’re out $50k, but that’s not the only cost here.

What about the loss of confidence? And how about the added stress and lost sleep?

And we can’t forget about “Opportunity Cost”.  Most people who lose $50k NEVER have the confidence to invest again, and when you calculate all of the returns they could have earned over 10, 20 or 30 years, the numbers are staggering!

The truth is losing $50,000 today will end up costing most people millions of dollars over the course of their life!

Scenario 2:

You take the time to learn how to measure and adjust risk and return, and a result you’re able to invest Aunt Gertrude’s $150,000 the right way.

Her money is in a relatively safe investment yielding her an annual ROI of 7%.

And because you’ve taken such good care of her money, she tells ALL of her retired friends to invest their money with you too, and your investing business skyrockets!

This is just a glimpse into the importance of structuring your deals to create the right balance between risk and return, and hopefully you understand that learning this skill can be the difference between extraordinary success and devastating failure for all investors.

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