When you put your hard-earned cash into an investment opportunity, you probably expect a minimal return. This is fine, as compound interest adds up over time. But if you want to better ensure against loss and maximize your returns, check out how one of the most prominent billionaire investors plays his cards.
The reward must outweigh the risk
The best investments are the ones that offer asymmetric risk/reward, meaning the possible reward is larger than the potential loss.
For instance, highly respected trader Paul Tudor Jones uses a five-to-one rule: he only invests if he can expect to earn at least five times his initial investment. So if he puts in $1,000, he expects the possible reward to be at least $5,000.
By following this rule, his investments can fail 80 percent of the time and he’ll still come out even. If he makes five investments of $1,000, he only needs one to work out; anything on top of that will be a pure gain.
So next time you’re looking to invest, look for opportunities where the upside far outweighs the downside. It’s a great way to protect your financial future.
For more on securing your financial well-being, including why your own biology can hurt your investment success, check out Unshakeable, by Tony Robbins.