The framing can cause investors to make a decision based on how the question is written and options are presented. Anchoring often leads investors to unconsciously benchmark, for example for stock prices, and then adjust decisions or expectations regarding that anchor. This bias can hinder your ability to sell a losing share, for example, in the false hope that you can get your money back. Likewise, bias of donation can cause you to overvalue an action you have taken and thereby hold the position for too long. And aversion to repentance can prevent you from taking tough measures for fear of going wrong. This can lead to decision paralysis after a market collapse, although statistically it is a good buying opportunity.
A concentrated bet can also make sense if you have the opportunity or the knowledge to take advantage of an opportunity that others may not see, even if it violates conventional diversification principles. Young investors can afford a higher risk than older investors because they have more time to recover when the market slows down. If you are five years after your retirement, you probably don’t want to take any extraordinary risks with your litter, because you have little time left to recover from a significant loss.
An overly conservative approach can of course mean that you do not achieve your financial goals. You can make investments that ensure you don’t lose money, but you give up Risk vs Reward most of the chance of a decent return. For example, US government bonds and accounts are supported by the US government, making these problems the safest in the world.
The second level of the risk pyramid consists of a range of relatively safe investment options, although compared to the lower level, the risks are higher and the return is potentially higher. This level includes conservative share purchases and balanced mutual funds. An example of conservative action is the actions of a long-standing, stable company, such as General Electric. An investment fund is an investment that combines the money of different investors and buys a package of shares, bonds and other investment securities.
A wealthy investor with millions of dollars in shares is best served by aggressively investing part of those shares. Mark Zuckerberg still takes technological and marketing risks to promote his business ideas, and sometimes they don’t develop. In 2014, Zuckerberg invested heavily in a virtual reality platform called Oculus. Although the platform still exists, it did not generate a rumor with Facebook users that it should generate revenue. Some called this a Zuckerberg mistake, but the reality is that these huge risks are critical to promoting a business and preserving the entrepreneurial spirit needed to achieve success in business. Part of an entrepreneur’s true strength and courage is his ability to accept risks, and even if they experience a setback, to come back and try again.
But before we can use these ideas practically, we need to understand the true nature of the financial markets. Regardless of the type of investment an individual makes, there are always two factors to consider when evaluating risk and reward. The first factor is called the investment time horizon, which refers to the amount of time the investor wants his money to be tied in the investment. Some investors prefer to make an original payout of funds and then add that payout regularly. Such investors typically benefit more at the second level of the risk pyramid. The second factor is called bankroll, which refers to the amount the investor can afford to lose.
As an independent writer and consultant, Ken focuses on actions, business principles, investment strategy and healthcare. His work has appeared in The Wilmington StarNews, The Daily Times, The Balance, The Greater Wilmington Business Journal, The Herald-News and more. In other words, many successful entrepreneurs are at significant risk, a worthwhile risk and enabling them to build a successful business.
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