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The riskier the investment, the higher the return. You've probably heard this phrase before, but it has a small error: the assertion of " return." In fact, this phrase should be replaced with " riskier investments should offer the prospect of higher returns because the return is not guaranteed just because the investment is riskier." At least, that's what Howard Marx cites and emphasizes in his book, *The Most Important Thing for the Investor*.
H. Marx, for those who don't know him, is one of the world's greatest investors with a fortune of over $2 billion. He is the founding partner and vice-president of OK3 Capital, the largest private equity fund in the world. This fund has over $150 billion under management, and just to give you an idea, even Warren Buffett follows and advises Howard Marx.
He is a master of the subject of investments, and one of the points he always mentions in his lectures and even in his book is about risk control. He always says that risk control is very important when making investments, but a very interesting point he makes in this book is... And that's why I decided to make this video to share this information with you, because when I was reading, I thought, "I need to share this information, I need more people to understand these types of risk, and that investing in a riskier investment or asset won't guarantee a higher return." You need to understand that risk isn't necessarily synonymous with volatility, as financial theory has always taught us.
Risk isn't just about an asset constantly moving up and down; at least that's what Hounsou Marx mentions in his book. For him, volatility doesn't convey the true meaning of the word risk. What shows this is the fear of losing capital, the fear of losing money. So, in this video, I'm going to share with you the five types of risks that can generate more profit or even affect you or others, as Hounsou Marx discusses in his book.
And for those who don't know me, I'm Mari Fugante, an investment specialist and creator of the "I Understand, Therefore I Invest" channel. I'm here every week to simplify the subject of finance and investments for you who want to learn about the subject and also achieve your financial freedom. So, of course, you won't continue this...
(This video is for HMX, but you must subscribe to the channel first.) There are several types of investment risks; some may impact some investors and others may not, which is why some investments may seem safer for some people and less safe for others. The first risk is falling short of your goal. Let's look at each investor.
Each person has an annual or monthly return goal. So, for example, if we take a person who has an annual goal of a 10% return on their investment portfolio, and this 10% covers all their expenses, everything they have to pay with that amount, if they have a 12% return, everything will be fine because they achieved their goal and even had extra profit.
Now, if we take a fund, for example, that aims for a return of at least 14% per year, if the return of this fund reaches 12%, like that person's, this return implies a more serious risk because they would need 14% per year in return and not 12% or 10% as was the case for the other person. So, in this case...
In this case, the risk is very subjective and personal. This is a risk where the market doesn't compensate for high returns if you take it. In short, this risk is neither absolute nor objective, and it can interfere when you plan to need a certain return and don't achieve it. It's a risk that won't be compensated for by the market.
In other words, this is the risk you run when you expect a certain return on your investment portfolio and actually get a lower return. The second type of risk mentioned by HMX is unsatisfactory performance. Here, he gives the example of a fund manager who, if they don't want to risk underperforming their index, for example, will mirror their fund to a bentmar.
They take all the assets that the index has and mirror their fund. In this case, their fund will never underperform the index; it will always follow the index. The point of this risk is that those investors who don't want to give up higher profits will indeed go through periods where the return on their investments will be lower than the index because...
You can invest your money wanting returns higher than the index if you don't risk it by investing in strategies that can outperform that index. I'll take this risk and make an analogy with things in your life. For example, if you want to be better than someone, if you do the same things they do, for example, at work you have a coworker and you want to outperform them.
If you do the same things they do, what will you do? Perform the same as them? Now, if you want to outperform them, what do you have to do? Different strategies. However, when you choose to use different strategies, what do you risk? The risk of sometimes underperforming because these strategies you'll use to try to outperform your coworker are strategies they've never used, or sometimes people haven't used them yet.
So you don't know if they'll actually work. But if they do work, you'll possibly achieve much higher performance than your coworker. But what did you do? You risked underperforming your coworker who's in the same position. The level you aim for, because you do aspire to surpass it at some point in your investments, is the same thing in this aspect of risk that Hounsou Marx talks about regarding unsatisfactory performance.
He means that when you want to outperform an index—that is, to perform better than the Ibovespa, better than the CDI, better than the fixed rate, any index—then you have to be willing to take the risk of underperforming that index in some time intervals. Therefore, this is also a type of risk you can take.
The third risk is the risk to the manager's career. For Hounsou, this is the extreme form of unsatisfactory performance risk. Why does he say this? Because in this risk to the manager's career, sometimes those managing a fund, as is the case with fund managers, choose not to take as many risks in investments.
So they take the money you invested in the fund and choose not to make so many risky investments in exchange for a potentially higher return, for example, to avoid the risk of being fired or losing their career and having their name tarnished. Because many people who invest in funds... Investors don't necessarily understand how investment funds work, and the fund manager is the one who chooses where to invest your money within the investment fund.
So sometimes, if they make a bad choice or place your investment in a riskier area, and for some reason it doesn't work out— which can happen, because it 's normal in the financial market—that manager will get a bad reputation; many people will want to withdraw their money from the fund, and they may also risk losing their career as a manager or something like that.
If it's a type of investment that has impacted many people, to avoid that career risk—the risk Howard Marx talks about—they opt for slightly less risky investments. That's why they don't put your money into investments that could yield higher profits. For this reason, Mr. Marx says that this risk is the risk of not getting such good returns simply because the manager is afraid of losing their job or something like that.
The implication here is quite clear: it's not worth taking a risk capable of compromising returns to the point of costing that manager their job. I'm going to discuss the fourth type of risk mentioned by Rud Marx in this book. Do n't forget to like this video if it's making sense to you, or if you've already received some new information or something that has added to your knowledge.
Don't forget to like it below. The fourth type of risk he mentions is unconventionality, more or less similar to the last type of risk I mentioned about a manager's career. This unconventionality risk is the fact that managers become comfortable making investments with average returns. So instead of thinking and being ambitious about wanting more profit, more profitability, they are satisfied with making the most basic investments to get good, but average, profits in return, and not taking as many risks to get higher returns.
You don't make different investments, you don't bet on different things. I'll give you an example here, which you don't necessarily have to apply to your life, but in the case of cryptocurrencies, Bitcoins, which are more unusual investments that not everyone makes, and if you have any profitability, you will have a significantly higher return than many people.
In this case of risk... Why wouldn't that type of investment fit in here? Because that risk is precisely the fact that you're comfortable investing in what's more comfortable in exchange for an average return, instead of risking different investments to potentially have much higher profits. In other words, it 's the concern with this risk that prevents people from achieving greater results.
But regarding this risk mentioned by H. Marx, I 'll add a point here, which is a bit of my opinion on this: not everyone is willing to take this risk in exchange for a higher return. That's why it 's so important to know your investor profile. Sometimes you're not the type of person willing to invest in cryptocurrency or some other more orthodox investment in exchange for very good opportunities and the possibility of much higher gains.
If you consider yourself to have a more conservative profile, don't make these more drastic, risky moves just because someone told you that you can make more money. It's very important that this risk, as Raúl Marx mentioned, is managed. For this reason, many times this risk is indeed necessary for many people who are not willing and prefer to be more comfortable with their investments to have a higher return.
It's okay if you're that kind of person, and it's okay if you choose to take that risk. I'm just reinforcing the types of risk that, according to Raul Marx, exist, and it's okay if you choose to take some of them. The important thing is that you know what risks you're taking. The last type of risk is illiquidity.
This is the simplest of all: it's simply not being able to convert your investment into cash when you need it. That's why, when you make an investment, you need to understand the timeframe of the investment, how long you need to get that money back, or if it has any volatility that could affect the asset's price when you need that money.
This risk is simple but very important for you to understand in your life as an investor. You have to understand if that asset, that investment, will give you liquidity when you need it. Risk isn't just losing money or having the volatility of an asset. It's not being able to convert your investment into cash when you need it.
This video only covered two pages of the book written by Raul Marx, so after watching this video, I recommend you read the book. Here's the whole thing, and if you want to know a little more about these types of risks I mentioned here, they're on pages 56 and 57. I'll leave the link to the book below for anyone who wants to read and understand a little more about the history and opinions of this successful investor, Wayne Marx.
So if you liked this video, don't forget to like it below and subscribe to the channel.
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