Course index:
- Basic Concepts of Money and Personal Finance
Introduction to the value of money, the importance of saving, and spending control. - Budgeting and Financial Planning
Create a personal budget, manage income and expenses, and set financial goals. - Inflation and Purchasing Power
Explanation of how inflation affects the value of money over time. - Interest Rates and Time in Finance
Differences between simple and compound interest rates and their importance in investments. - How to protect your savings. Protect yourself from scams.
How to protect your money from the scams that abound today - Basic Savings Instruments
Explanation of savings accounts, term deposits, and how they work. - Introduction to the Stock Market
Basic concepts of the stock market and its role in the global economy. - Actions: What They Are and How They Work
Explanation of stocks, types (common and preferred), and how to invest in them. - Bonds: What They Are and How They Work
Differences between corporate and government bonds, and their importance in diversification. - Risk vs. Return on Investments <<<<<<<<<<<<<<<<<<<<<
Concept of risk and how it affects investment choices. - Diversification and Creation of Basic Portfolios
Basic diversification principles to reduce risk in an investment portfolio. - What is an ETF and How Does it Work?
Introduction to ETFs (exchange-traded funds) and how they track market indices. - What is a Mutual Fund?
An explanation of mutual funds and their benefits for beginners. - Financial education for the family
All the information you need to make ends meet. - Economic Cycle and its Impact on Investments
How the stages of expansion and contraction in the economy affect investments. - Growth Stocks vs. Value Stocks
Differences between these types of actions and when each is appropriate. - Fundamental Analysis of Stocks
Explanation of how to analyze a company's value based on its fundamentals. - Basic Technical Analysis: Charts and Patterns
Introduction to basic technical analysis tools, such as trend lines and candlestick patterns. - Options: What They Are and How They Work
Basic concepts of call and put options and their uses in investments. - Futures: What They Are and How They Work
Introduction to futures contracts and their application in investment and speculation. - Introduction to Cryptocurrencies
What is digital money, how it was created, and the characteristics of Bitcoin and other cryptocurrencies. - Blockchain and its Importance in Finance
How the technology behind cryptocurrencies works and their applications in finance. - Risks in Cryptocurrency Trading
Volatility, fraud, and regulations in the cryptocurrency market. - Leverage Principles and its Risk
What it means to trade with leverage and the associated risks. - Investor Psychology and Emotion Management
How emotions influence investment decisions and tips for managing them. - What is Algorithmic Trading
Basic explanation of the use of algorithms to perform operations in the financial market. - Financial Analysis of Companies
Introduction to basic financial statements and their interpretation for valuing companies. - Investing in Commodities: Gold, Oil, and Other Goods
How commodity investments work and their role in diversification. - Advanced Investment Strategies: Hedging and Derivatives
Introduction to strategies for managing risks through financial derivatives. - Creating and Managing a Complete Portfolio
Practical application of prior knowledge to build and manage a diversified portfolio.
Imagine you're in a casino. There are lights everywhere, beeping machines, and tables with cards and roulette wheels. In the casino, you can play different games. Some are quiet, like betting a few pesos on a slot machine that doesn't give you much money, but doesn't give you much if you lose. Others are more exciting, like risking it all in one spin on the roulette wheel: if you win, you take home a ton of money, but if you lose, you're left with nothing.
This is called "risk" and "return." Risk is the chance of losing, and return is what you can win. In the casino, riskier games often promise higher returns, but they're also more likely to go wrong. Now, let's leave the casino and think about investing money in the real world, like the stock market or other places where you put your money to grow. It's true that the world of investments is very different from the world of casinos.…it's not just pure luck. The market also involves "risk" and "return."
If you put your money in something safe, like a savings account at the bank, you'll earn very little, but it's almost impossible to lose. But if you invest in something riskier, like shares in a startup or bonds from a country that's in trouble, you can earn much more... or lose everything. The idea is the same: the higher the risk, the greater the chance of profit, but also the greater the chance that things won't turn out well.
Why am I telling you this? Because understanding risk and return is key to deciding where to invest your money. Not all of us need the same money at the same time. For example, if you're thinking about paying everyday bills, like food or rent, you can't risk going broke. You need a sure thing there. But if you're saving for when you're older and retire, you can try something riskier, because you have time to wait for things to go up, even though they sometimes go down. In this article, we'll go over all of this slowly, with simple examples, so you understand how it works and how you can use it to take care of your money and make it grow.
What is risk? Is it the same as volatility?
Let's start with the basics. Risk comes when you're not sure what's going to happen to your money, and there's a chance you could lose it. Imagine you lend 100 pesos to a friend. If your friend always pays you back on time, there's not much risk: you know you'll get your 100 pesos back. But if you lend to another friend who sometimes forgets, doesn't have a penny, or is a bit of a scammer, there's more risk: they might not pay you back at all, and you'll lose that money.
The same thing happens with investments. When you invest in something, the risk is the possibility that you won't get back part of what you invested, or that you might even lose everything. Now, be careful, because There is an important difference between risk and volatility, and many people confuse them.Risk is the chance of actually losing money, of not getting back what you invested. Volatility, on the other hand, is how the price of what you bought moves: whether it goes up and down a lot or whether it stays relatively unchanged.
For example, if you buy shares in a company and the price is 100 pesos one day, 80 pesos the next, and 120 pesos the next, that's volatility: the price fluctuates a lot. But just because it's volatile doesn't mean you're going to lose everything. If you end up selling at 150 pesos, you've made money even if it's gone up and down a lot. The risk would be if that company goes bankrupt and the shares are worth nothing: that's when you really lose.
In a casino, the risk is clear: if you bet 10 pesos on a slot machine, you can lose those 10 pesos, but no more; the risk is small. If you bet 1,000 pesos on a single roulette wheel, the risk is enormous: you can lose all 1,000 in a second. Volatility doesn't apply as much in a casino because everything happens quickly, but it does in the stock market.
For example, if you put your money in a fixed-term deposit at the bank, there's no volatility (the price moves linearly upwards, without any major shocks) and almost no risk (the bank will pay you back for sure... well, unless there's a corralito). But if you buy shares, there's volatility (the price goes up and down) and risk (the company could go bad and you could lose money). But one key detail: maybe that company is very reliable, and you know it won't go under, or that it's almost impossible.
In that case, you'll experience volatility, as prices rise and fall due to various factors, but the risk is low because, if the company does well, its stock will eventually rise over the long term. Understanding this difference helps you avoid panicking if something fluctuates significantly, because it doesn't always mean you're going to lose.
What is return? The return on risk
Now let's talk about return. Return is what you earn when you invest your money somewhere. Let's go back to the casino: if you play the slot machine and bet 10 pesos, you might win 15 pesos. Those extra 5 pesos are your return. If you bet 1,000 on roulette and win 35,000, your return is huge: 34,000 pesos. But be careful, you don't always win, and that's why return is linked to risk.
In the investment world, returns work similarly. If you put 1,000 pesos in a bank deposit, they might give you 1,050 pesos after a year. Your return is 50 pesos. It's not much, but it's secure. Now, if you buy shares in a company that makes cell phones and everyone likes them, maybe you invest 1,000 pesos, and in a year they turn into 2,000. Your return is 1,000 pesos—much more! But it can also happen that the company doesn't do well, and your 1,000 pesos turn into 500. That's when you lose, and the return is negative.
The general rule is this: if you want a bigger return, you have to accept more risk. It's like in the casino: bigger prizes come with harder plays. But investing isn't just a matter of luck. You can learn and choose wisely to make the risk worthwhile.
Why is there risk in the market?
You might be wondering: why is there risk in investments? In a casino, it's because everything depends on chance. But in the stock market, risk comes from things you can't fully control. For example, if you buy shares in an oil company, it might do great if it finds more oil fields or the price of crude oil rises. But if the fields are running out, there's a catastrophe, like a sinking ship (like the one in the book). Exxon Valdez) or the company runs into trouble, the stock price drops, and you could lose money. That's risk.
There's also risk depending on the country you invest in. In Argentina, sometimes the dollar rises sharply or inflation makes everything more expensive. This affects bonds (which are like loans to the government) and stocks. If the country is doing well, your investments go up. If there are problems, they go down. Volatility, on the other hand, is reflected in how those prices fluctuate day to day, but the real risk is whether you lose your money forever.
But don't worry. While you can't eliminate risk, you can manage it. The key is to spread your money around and think carefully about what you need it for. Let's see how to do that.
Quiet investments for everyday expenses
Think about the money you use to live: to buy food, pay for electricity, gas, or bus fares. That money can't disappear, because you need it now. Therefore, for everyday expenses, it's best to choose low-risk investments. These are the ones that have a low chance of losing money, although they don't yield huge returns.
One example is a fixed-term deposit. You put your money in the bank, leave it for a period of time (like a month or a year), and they return your money plus a little extra. It's not much, but it's secure. In Argentina, you can also invest in Treasury bills (short-term bonds, usually less than a year), such as those that are paid in pesos and don't change much in price. Another option is a dollar-denominated savings account, if you have some stashed away, because the dollar tends to rise over time and protects you from inflation.
Why lower risk for this? Because if you put that money into something risky, like stocks, and the price drops just when you need to pay the bills, you're left with nothing. It's like going to the casino and betting your lunch money: if you lose, you don't eat. So, for everyday things, find something that gives you peace of mind and doesn't make you worry.
Most risky investments for the future
Now let's think about something different: the money you want to save for when you're older, like for your retirement. You can take more risk there, because you don't need it today or tomorrow. If things go down a bit today, you have time to wait for them to go up again. That's why, for the long term, higher-risk investments are a good idea.
What are these investments? Stocks are a classic example. You buy bits of a company, and if the company does well, your shares are worth more. But if it does poorly, they're worth less. In Argentina, there are also dollar-denominated bonds, like the AL30 we already mentioned. These bonds can be volatile (they go up and down in price), but the real risk is if the country defaults, although they sometimes yield good returns over time. Another option is mutual funds, which pool money from many people and invest it in different things, like stocks or bonds.
Why take a risk for retirement? Because time is on your side. If you invest 1,000 pesos in stocks and they drop to 800 pesos in a year, it's no big deal: you can wait two or three more years, and maybe they'll rise to 2,000 pesos. Volatility can be scary, but the risk of losing everything is lower if you choose wisely and wait. In the long run, risky investments usually yield a higher return than safe ones.
Blending risk and return: the perfect balance
So, how do you invest well? The key is to mix things up... or diversify (a word that doesn't apply). You don't put all your money in one place, just as you don't bet everything in one gamble at the casino. Use safer options for what you need now and riskier options for what comes next. For example, if you have 10,000 pesos, you can put 7,000 in a fixed-term deposit to be safe and 3,000 in stocks or bonds so they grow over time.
In Argentina, this is incredibly important because prices rise sharply and silver loses value quickly. Safe investments help you avoid losing out to inflation, and risky ones give you the chance to earn more than inflation. It's like having two pockets: one for today and one for tomorrow.
An example: Juan is 40 years old and wants to save. He puts half of his money in a bond that gives him a little bit each year to pay for his things. He puts the other half in shares of a technology company because he believes they'll be worth much more in 20 years. If the shares go down due to volatility, he doesn't care because he doesn't need them now. But if they go up, he'll have a great retirement.
Common mistakes and how to avoid them
Sometimes people get the risk-return ratio wrong. Some put everything into risky investments and then have no money left to live on. Others are scared by volatility and only use safe investments, without growing their money. You can do better by thinking carefully about what you want.
Don't think that risky things will always turn out well. In the casino, you don't win every game, and neither do you in investments. But don't stick to safe bets, because over time, inflation eats away at your savings. Find a balance and ask for help if you don't understand something. There are people who know a lot and can guide you.
Conclusion: You decide how much to risk
In the end, risk and return are like two friends who always go together. If you want low risk, you have low return. If you want high return, you have to accept more risk. Volatility is just movement, but risk is the real chance of losing. In the casino, everything is fast and crazy. And in fact, as I've expressed in The Argentine Pocket Investor, In the long run, in the casino, the gambler always loses... The house always wins.. In contrast, in stock market investments, the investor always wins in the long term. You can also think about it calmly and choose what works for you.
For your everyday expenses, stick to the safe option: fixed-term deposits, short-term bonds, or something that won't break the bank. For your retirement, go for more: stocks, dollar-denominated bonds, or funds that can grow significantly. If you mix the two well, you'll be ready for today and tomorrow. See? It's not that difficult. You just have to understand how it works and decide carefully.
Next course date
Questions for you to reflect on
Are there investments with high returns and volatility but low risk?
Why isn't it a good idea to have all your money invested in stocks?
Why isn't it a good idea to leave everything in a savings account?
A brief overview of The Pocket Investor
The Pocket Investor is a project that combines experience and passion for financial education to help you transform your relationship with money. Through personalized mentoringWe help you design investment strategies tailored to your goals and needs, optimizing your portfolio to address challenges like inflation and the dollar.
The books on finance and investment, including the popular The Argentine Pocket Investor - El Inversor de Bolsillo argentino, are practical tools that explain complex concepts in a simple way, bringing the world of investments closer to anyone interested in financial growth.
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