To invest is to allocate money in the expectation of some benefit in the future.In finance, the benefit from investment is called a return. The return may consist of a profit from the sale of property or an investment, or investment income including dividends, interest, rental income etc., or a combination of the two. The projected economic return is the appropriately discounted value of the future returns.
Investors generally expect higher returns from riskier investments. When we make a low risk investment, the return is also generally low.
Investors, particularly novices, are often advised to adopt a particular investment strategy and diversify their portfolio. Diversification has the statistical effect of reducing overall risk.
An investor may bear a risk of loss of some or all of their capital invested.Investment differs from arbitrage, in which profit is generated without investing capital or bearing risk.
Savings bear the (normally remote) risk that the financial provider may default.
Foreign currency savings also bear foreign exchange risk: if the currency of a savings account differs from the account holder’s home currency, then there is the risk that the exchange rate between the two currencies will move unfavorably, so that the value of the savings account decreases, measured in the account holder’s home currency.In contrast with savings, investments tend to carry more risk, in the form of both a wider variety of risk factors, and a greater level of risk.
Investors famous for their success include Warren Buffett. In the March 2013 edition of Forbes magazine, Warren Buffett ranked number 2 in their Forbes 400 list. Buffett has advised in numerous articles and interviews that a good investment strategy is long-term and due diligence is the key to investing in the right assets.
Edward O. Thorp was a highly successful hedge fund manager in the 1970s and 1980s who spoke of a similar approach.
The investment principles of both of these investors have points in common with the Kelly criterion for money management. Numerous interactive calculators which use the Kelly criterion can be found online.