Risk and Reward Investing

We all hear it all the time. When investing or trading, risk and reward comes hand in hand. The greater the risk, the greater the reward.

When you invest in a company in the Philippines, there are 289 companies publicly listed, then you put all your money (100%) in just 1 company, you are playing at a probability of 1 / 289 or 0.34%. The risk is great but so is the reward. The risk is that, out of the 289 companies, you are betting all your money in just 1.

You can decrease the risk by buying more than 1 company. Lets say you invest in 30 companies out of 289 (30 / 289), you have 10.38% chance that you'll earn money. But of course the rewards will be less. Because you are now dividing your money to 30 companies.

I want you think about this for a minute... This kind of probability is all around us. Your day job is 0% risk but not so much reward. In terms of monetary value, you do not risk any money, but you earn money, guaranteed,  at the end of the month. That is why most of us feel safer in a job than it is to invest. And we do not want to lose money. So we choose a safer route. Since the risk is low, you won't get rich in a 0% risk investment. Just as you won't see anyone getting rich in a day job.

Getting into business is said to have 5% success rate. Real estate investing is also in the same range. You only have 5% change to succeed and 95% chance to fail. What I'm trying to focus my thoughts here is that, how do we get to succeed 100% of the time yet still be able to risk to get sustainable rewards that could fund your retirement.

This might come as a surprise to you because the theory is simple. You do not need to attend any seminar nor go to school to learn it. The strategy is to save as much as you can from your income. Saving 80% of your income is ideal.

Seems easy right? And most people would probably ignore. When you save your income, you earn 100% of the money (100% success). That money then will be invested in 100% guaranteed-to-return securities like bonds and dividend paying stocks. Do this for 5 years and you will find yourself retired, free from money worries and the securities you invested will be producing money for you non stop.

The strategy is simple. Save as much of your income as possible. Save 50% of your income, 80%, 90% or even 100%. I would think twice following financial advisers saving 10% -15% of my income. Since if I follow that advice, I'll still be working at age 70. So save 50% and try your best to reach 90%.

This is not a sacrifice or deprivation in anyway. Saving 80% of my income, though large, did not even affect the quality of life I lived. I treat myself to vacations, good food, good wine, going out. But I just have a different way of doing things that don't require much money. So I could save 80%. And in 5 years, I found myself financially free. A place where working is optional.