Now as many of you know I do not play very much golf, as a attr of fact, I play none. So I am not going to be talking to you about golf, but rather about a risk you don’t want to take.
In a previous video we talked about question 16 of the 20 must answer questions which states “Do you have a method by which you can measure the risk of your portfolio”. This is when we talked about volatility and standard deviation.
But today I am going to elaborate on that point and show you that not all risk is created equal.
Many times I hear an investor say – Yea Yea I know that I have all my money in one stock and I have a lot of risk, however risk and return are related so I will make more money or I know I have my money only in this sector, say banks lately, but when they all come back I will be rewarded since risk and return are related.
Well since this is the only place on the internet where we care enough to tell you the truth, I have some good news and some bad news. The good news is if you take the right kinds of risks they have a higer probability of being related i.e. having higher expected returns in the long term. But here is the bad news – Not all risk is created equal. Let me give you an example.
You see this golf course. Well lets say you or I were playing this hole and we were holding are trusted golf club. As we are teeing off one of those Florida thunderstorms decides to come by and there is lighting all over the place. Now lets say I take my club and hold it up in the air like this.
So let me ask you – Am I taking Risk? Well I know you know the answer to that. YES! I AM!
What is my expected return or reward? Well as a matter of fact I do not have an expected reward I have an expected penalty worse case which I can get struck dead by lighting. But more realistic I will probably catch a bad cold.
So as you can see not all risk has an expected reward and that is true about investing.
Investors take all kinds of stupid risk and by stupid I mean imprudent where they don’t have an expected return to the risk. Whether that is owning 5 stocks like Jimmy Cramer says or putting your money in one stock of a fortune 500 company because you worked there for 30 years or you think you really know something special, or you are trying to time the market.
Whatever it is there is all kinds of imprudent risk with ZERO expected return as a matter of fact they have an expected reduction in returns to your portfolio.
Only the right kinds of risk have an expected return my friends and for that you need a Coach.
For more about risk check out this video.
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