What is risk?

As we all know, there are many risks in life – some are worth taking and some

aren’t. But it depends who you ask. What feels like risk to you, might not feel

like risk to someone else. I think the best way to understand risk is by

understanding the possible rewards. Once you know that, then you can

determine whether the risk is worth the reward.

Just watch shows like “The Price is Right” or “Who Wants to be a Millionaire” to

see how differently people perceive risk. The correct choice or the correct

answer can double what you win while the wrong choice or answer will send

you home with nothing. Is the gamble worth it? Some think it is; others do

not.

Risk is everywhere. Physical risk; lifestyle risk; business risk; investment risk…

I will NEVER sky dive or hang glide or scuba dive or race cars because I can’t see

the reward. I can only see the risk – injury, disability, death. But people

obviously do those things. What is the reward? I’m not sure, but I suspect they

find it exhilarating; I suppose it feeds their sense of adventure (which I don’t

have when it comes to my life!!)

Is spending thousands of dollars on education a risk we take to enable us to get

a better paying job? Quitting a good paying job to start our own business?

Having kids (yes, they are costly)?, and the list goes on – is the reward worth the

risk?

But this blog is about investments. Is it worth taking risk in your investments?

The question is the same as the above mentioned risks. What are the risks and

what are the rewards?

The most common risk people talk about in the investment world is the risk of

losing your money. And that is definitely a risk if you are making bad

investment choices. But if you are making the right choices (good businesses)

and making sure your long term money stays invested for the long term, the risk

is minimalized. If you position money for the long term and then decide to

redeem it sooner, especially when the markets are down, you will lose money.

You can mitigate that risk by sticking with your plan.

What is another investment risk? And the one that I feel is the biggest

investment risk? OUTLIVING MY MONEY!!! So you’ve put money away faithfully; paid yourself first and hope to retire at Age 65. With government benefits and a monthly income from your investments, will you be able to retire?

YOU have chosen to take NO risk with your investments; all of your money is in

GIC’s at your bank where you have averaged a 5% rate of return;

I have invested in shares/stocks/mutual funds and averaged 8% in my portfolio

of good quality companies. The difference is only 3%. Will it really make that

big a difference? Is it worth the risk? Let’s see.

We will both put $200/month away for our entire working career - Age 20 to

65. If you google “Investment & Regular Deposit” calculator, it will tell you that

we both invested $108,000.

At 5%, you will have $393,584

At 8%, I will have $967,337

THAT IS A HUGE DIFFERENCE!!

Given our current life expectancy (81.75 years old), your investment will give

you an income of $2,500/month before it runs out at Age 85; mine will give me

an income of $8,000/month before it runs out at Age 85.

If $2,500/month isn’t enough to cover your expenses, you WILL run out of

money before you run out of life! What a depressing thought! I do NOT want

to live my last years in poverty, do you? We will look at all the solutions in

another post.

We will be taking a week off from posting to give you an opportunity to catch

up on our posts. In two weeks from now, what will we be talking about?

Possibly Solutions; maybe ideas from the 22 (almost 23) year old? You will have

to come back and see.

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