Those Who Take The Risk Reap The Reward

The long list of behavioral market effects often comes together in an investor’s grief story. Overconfidence keeps investors focused on portfolios and negotiate excessively about behavior that can destroy wealth. Cognitive dissonance causes us to ignore the evidence that violates our opinion, leading to myopic inversion behavior. And representativeness bias leads investors to assess risks and performance based on, for example, surface characteristics, assuming that the shares of companies that produce products they like are good investments. In general, it is true that the greater the risk a person takes, the greater the reward he will receive if the investment makes money. On the other hand, if an investor takes only a small risk, he probably deserves a small reward.

If a person buys shares in a company that has been stable for decades, such as Coca-Cola, that person takes little risk. It is also equally unlikely that the investor will make a lot of money immediately after buying the shares. If that person invests money in a less stable company, for example a new technology company, they take a big risk.

Business risk management teams work to reduce the effects of risks on corporate profits to maximize potential income. Business risk can take many forms, including equipment failure, changes in market demand and lower than expected sales. Professionals mitigate risk through detailed performance forecasts based on previous sales records, consumer purchase trends and competitor analysis. This allows risk management teams to map actions, create operational budgets and plan product launch data to maximize potential gains while reducing the chances of business effort issues. According to Hawley, the greater the risk in business, the greater the potential financial reward for the entrepreneur.

On weekends I also read a book about an author’s surfing days when he was young. But, as the author acknowledged, he was a risk taker, often at the expense of him and the people around him. Most of his risks were spontaneous and hasty without thinking about the future, except finding that perfect wave.

However, there is no guarantee that the company will make money and increase the value of the shares. If the value of the shares fell to $ 90 per share and the investor sold his shares at the time, he would have less money than when he made the investment. You can choose from a wide variety of funds with different risk profiles. Although mutual funds do not completely eliminate risks, you can use them to protect yourself from the risk of other investments. If you’re enterprising, you probably have pretty big ideas about how you want your company to work and what it will look like in five or ten years. This means that it sometimes fails, but as an entrepreneur, failure is only part of the deal.

It is important to note that individual investors are not the only ones taking financial risks. Banks and other financial institutions are at risk when they Risk vs Reward lend money to individuals and companies. Likewise, insurance companies take risks if they agree to repay their customers in the event of a future loss.

Interest rates on these accounts are low and there is virtually no risk of losing money. The advantage of holding such an account is that the person has immediate access to the funds in the account. Treasury accounts (also known as T-letters) are government effects that guarantee the investor a fixed return after a short time. T accounts are considered the safest form of investment by many economists. People have been taking financial risks since the beginning of trading, which some anthropologists think are 150,000 years old. Two events, one apparently small and the other of great historical importance, turned risk analysis into complex science.

All investors must compromise their level of comfort and develop an investment strategy around that level. A portfolio with a significant risk may have the potential to achieve an excellent return, but it can also cause you to lose your savings. Your comfort level with risk must pass the “good night’s sleep” test, which means that you don’t have to worry so much about the amount of risk in your wallet that makes you sleep. Ken Little has over two decades of experience writing about personal finance, investment, the stock market and general business issues. He has written and published 15 books, specifically on investments and the stock market, many of which are part of the well-known franchise, The Complete Idiot’s Guides.