Alpha Teach Yourself Investing in 24 Hours: An Analysis (part 40)

                     

Risk and Return (part B)

by

Charles Lamson

Risk/Reward Relationship

The relationship between risk and reward is fundamental to the understanding of investing. Investing is inherently risky. In addition, the perception of risk is inherently relative.

If this sounds like double talk, you are not far off the mark. But both statements are true. The definition of investing places risk as a component.

Most of us would consider skydiving a risky hobby, yet many people eagerly participate. My perception of the risk of skydiving is high. People who do it all the time do not share my evaluation of the risk of skydiving.

Is skydiving any more risky because of my perception? Is it any less risky because people choose to do it as a hobby? The answer is clearly no. There are certain risks associated with skydiving that are not enhanced or diminished by people's perceptions.

PROCEED WITH CAUTION You are more likely to stick with an investment plan you are comfortable with than one that keeps you up at night.

In his book Alpha Teach Yourself Investing in 24 Hours, this is Ken Little's way of suggesting to you that when you begin to evaluate risk and your tolerance of it, be sure to be honest with yourself. Do not let the media frenzy over trading or your friend's futures' scheme convince you to take risks you would not normally take.

The goal of Little's book is to empower you to make your own investment decisions, while also helping you to sleep well at night. Worrying about the negative possibilities of an investment is not worth whatever gain you may think can be achieved.

Understanding what the risks actually are will go a long way toward helping you decide what your risk tolerance is. On the theory that we are afraid of that which we do not know, let us take a look at what your investment risks are in upcoming posts.

This is not to be confused with risky investment products. We will discuss those in later posts. This upcoming series of  posts is focused on those risks, real or perceived, that are a fundamental part of investing.

*SOURCE: ALPHA TEACH YOURSELF INVEST IN 24 HOURS, 2000, KEN LITTLE, PGS. 236-237*

END

PROCEED WITH CAUTION

You are more likely to stick with an investment plan you are comfortable with than one that keeps you up at night.