“How much I missed, simply because I was afraid of missing it.” – Paulo Coelho
Be willing to take the appropriate amount of risk for the gains you stand to make.
We’ve all heard the phrase, “No pain, no gain.” In investing, the more aggressive investors are generally more aggressive because they want to make more money over the long run and are willing to lose more money in the short run.
Many investors struggle with how to properly understand and select their risk level. The risk / reward tradeoff is a real challenge. But what does this really mean? It means that the amount of money that you stand to gain should be worth the risk you took.
Let’s look at an example. If someone who you don’t know very well asks to borrow $50 from you and they offer to pay you back $60 in two weeks, it might not be worth taking the risk. However, if they offered to pay you back $100 you may jump at the chance to double your money. And, if the person sweetened the deal even more by offering you $150, this might appeal to you even more! Again, the goal is to understand the risks you are taking and decide if the risks are worth the potential gain.
Although it sounds attractive, if someone could truly figure out how to be aggressive without running the risk of losing money in the long run, without paying an insurance company to buy your risk, or risk going to jail, they would probably be one of the richest people on earth. There is no free lunch in investing.