1. #1

    Join Date
    Aug 2011
    Lahore, Pakistan
    Blog Entries

    Overcoming Greed in Investments

    ‘Higher the risk, higher the return’ is statement all of us are familiar with. Let me tell you that the statement looks flawed because it gives an impression that if you take higher risk, you can get higher return which is not the case. The right investment could have been ,’ Higher the risk, higher is the expected return’ which means that potential for higher return is created when you take high risk. If we accept the second statement to be correct, one important aspect of risk and return trade off comes out. Let us examine this.

    If you come across an investment scheme which is offering you moon i.e. offering an unbelievable return in comparison to the prevailing rate of return in an economy, it is time to be cautious. In Pakistan, the safe rate of return pre-tax currently is between 9 to 10%. If you come across a deposit scheme or an investment option which is offering you 7-10% of return, it is time to be cautious. Why would an institution offer you 5% additional rate of return? Isn’t the institution credit hungry? Yes, indeed.

    But as investor we tend to be guided by greed, rather than rational approach. We want our money to grow double in overnight which is as good as unnatural. This is what is exploited by such depositors. Depositors know that we are greedy and hence they lay their trap very well. As a sensible, rational investor our focus should be to evaluate all investments, understand it and then make investment decision. In case we are not able to understand an investment, then just forget the option. Higher risk may have higher reward but it needs evaluation. In life always ensure that all your investments decisions are based on reasons, rather than instinct. This will help in overcoming greed.

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