How do you personally access financial risk vs reward?

Discussion in 'Business & Economics' started by Seattle, Jan 17, 2023.

  1. Seattle Valued Senior Member

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    8,874
    How do you access risk/reward in your life?

    There is no one right or wrong way of course. It's just a subject that I find interesting.

    You can be more or less risk averse than someone else. You could be willing to accept more risk because you have a lot of money anyway or you could feel that you have to accept more risk because you have so little money. Examples would be riskier stocks vs playing the lottery.

    You could have some money invested and use the old 60/40 rule to plan for retirement which would be 60% in stocks and 40% in bonds. You could use the "rule" that the stock percentage should go down as your age goes up so you might have 70/30 if you are 30 and 30/70 if you are 70, for example.

    You could decide that bonds aren't that great these days so you could chose to eliminate bonds at 40% and keep 20% cash (which is even safer) and increase the stock allocation to 80%.

    This concept doesn't even have to apply to investments. I know a guy who scuba dives but doesn't like to go too deep because "I have young kids at home" but he rides a motorcycle to work every day. Again, it's his personal risk assessment.

    Maybe you go drinking with your friends frequently, know it isn't great for your health but you eat right and exercise and take that all into account.

    Of course you may make all these choices without really thinking about them in this way. Also, a lot of times you may make some of these decisions/choices for reasons that have nothing to do with risk/reward. For instance, I have done some higher risk recreational activities but I rarely drink. Is that to balance the risk from the hobbies? No, I just don't enjoy drinking very often.

    Do you have any ways that you think about risk/reward as it applies to you or is it just something that operates in the background without you giving it a lot of thought?

    If no one finds this an interesting topic, consider it as just another blog post (without footnotes) on here.

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  3. sculptor Valued Senior Member

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    access?
    or
    assess?
     
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  5. Seattle Valued Senior Member

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    • Good catch.
     
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  7. ThazzarBaal Registered Senior Member

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    Good question - at one time i'd have chosen a more risky investment strategy. Nowadays, I'm hesitant to invest at all. Not because of potential payout, but limitations in financial stability present day. Not to mention national realities in terms of economic stability. The value of the us dollar is dropping, foreign trade uncertain, outsourcing unpopular, and jobs/career opportunities limited for people like myself. G.E.D no high school diploma with some college attached and a resume that includes more jobs than my entire highschool football team combined doesn't lend itself to a potential employers sense of security nor appeals to it.

    To date, I'm gratefully disabled and receiving benefits, which reflect my highest paying job in the early 90's. It isn't much, which pretty much dictates and instills my personal fear of too much risk to risk anything to an uncertain investment strategy.

    So, it's more than a little concerning. Moderate risk was my last choice in a 401 k investment plan. That was about 8 years ago. It's personal, so only you can truly decide what you're willing to risk in any investment endeavor.
     
  8. Seattle Valued Senior Member

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    8,874
    I agree, it's definitely subjective (personal). When you look at risk/reward it also roughly presents options that are, in theory, all equivalent before you apply your personal preferences. Meaning high risk/high reward is equivalent to low risk/low reward or medium risk/medium reward.

    Risk is being fairly priced into all those choices (potentially). It's kind of similar to the negotiating/price setting scenario where someone is willing to either be a seller or a buyer at a certain price. That's when the price is fairly set.

    I have a new car. You have the same model new car. I want to sell mine to you for $30k. You think that's too high so I say OK I'll buy your car for $30k. If you won't sell at $30k then I've priced the car fairly. I'm willing to sell it at that price or to buy it from you at that price.

    Risk/reward options can be similar if each option is priced "fairly". If you have a greater wealth to fall back out you may chose the high risk/high reward option. If you have little to fall back on you might choose low risk/low reward. However all of the options may have priced the risk component fairly.
     
  9. Sarkus Hippomonstrosesquippedalo phobe Valued Senior Member

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    Let's look at the case of lotteries. High risk, high reward... at an event level, at least. Expected return is, pretty much, the same as throwing your money down the toilet, though.

    But let's say you have a 1 in a 100 million chance of winning 50 million for a 1 dollar bet... expected return of a loss of 0.5 dollars per dollar played. Not great.

    So would you rather play that lottery, or would you rather someone gives you a much lower risk game: 50:50 odds, and per game you either win your dollar back or lose it - so same expected return of being a dollar down every two games?

    Are the two really equivalent? At an expected return level, sure. But psychologically they don't seem to be. The mere possibility of a life-changing outcome for the low cost of investment (in the grand scheme) makes the lottery of far greater appeal for many.

    Is this difference part/all of the "personal preferences" you were talking about?
     
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