Accepting Risk

finance a la shmoop. what is risk? it's a game! this one remember Parker Brothers

roll the dice move your armies take Kamchatka own the world! okay so that's a [risk board game pictured]

slightly different variant than investing risk. but think about the

notion of risk and reward being married to each other in a we fight every

Thanksgiving and question why we were ever married in the first place kind of

way. buy a US government bond and the odds it doesn't fully pay as promised are

about equal to the odds of our being nuked. typically investors trade-off

between risk and reward if you take high risk you want high reward, or at least

the potential of it. it would be kind of stupid to take high risk for no reward

right? well the US government pays its bills hi Greece we're looking at you. but

a bond only gets you a few percent a year return these days. had you bought

call options on Amazon when it was 500 bucks a share with those call options at

$700 expiring four months later, well you'd have taken massive risk but at the [chart showing growth of amazon stock going up]

end of those four months had you timed things right

you'd have made like 20 times your money. how do you timed it just one month early

or late well you'd have lost everything. investing in the stock market generally

carries two flavors of risk. there's market risk ie the risk that the whole

market goes down and you lose money that way, and then there's intrinsic or

individual stock risk. ie the market just trundles along but you pick a bad stock

and it goes down while the market is flat or goes up. got it ?market risk .the

whole world blows up and your nest egg gets taken down with it. intrinsic risk.

it's only you who sucks. you put all your eggs in a basket with a bad handle and

well now there are a lot of chickens that ain't going to happen. [eggs in basket]