How to reduce your risk?

Let’s do an experiment.

I am going to present with you with an investment decision with two options.
Please choose the one which will reduce your risk.

You have £100k.

A. You can invest your money by buying a 10-year bond with a 10% yield

This means you will receive £10k per year and your £100k back at the end.

B. You can put your money in a bank checking account which currently pays 10% APR

This means that if interest rates stayed at 10% then you again receive a total of £10k every year with your £100k initial capital still yours.

These investment options look identical if interest rates never change.  But the rate of interest is not going to stay at 10%.  To make it very clear I will let you know that interest rate are going to change tomorrow and will either be 5% or 15% but you do not know which.

Remember I’m asking for the option which reduces your risk.

Answer in a later post.

2 thoughts on “How to reduce your risk?

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