I was recently in the market for a new laptop. Before going shopping I put together a list of the features I needed in my new laptop. Upon doing so I then went looking for the best-priced model with the required features. Alternatively, I could have set myself a fixed budget of, say £1,000, and then shopped around for the highest quality model within my budget. Getting the “best bang for your buck” is a common tactic when shopping.
Investing is no different. Indeed, it should be easier because our decisions do not need to be - or should not - be influenced by marketing or branding.
When investing, it is important to shop around and compare different opportunities. Thinking about the shopping analogy the “Price” of an investment is your Return and “Quality” equates to Risk.
Set yourself a “risk budget”. In basic terms, you can categorise this as low, moderate or high. Then go out seeking the best returns available for your risk profile. Alternatively, you might have a target return in mind – say 8 or 10%. You then want to shop around and find the lowest-risk investments that meet your return objectives.
The chart below shows the risk and return profiles for a selection of development finance loan investments, labelled A to F.