See: Risk Lover. See: Risk Seeking. See: Risk of Ruin.
You're 25. You're a lawyer. (Sorry.) You have a working career now of at lest 50 years. (Sorry.) You're committed to saving $1,000 a month, every month, "forever," no matter what. Because you have decades before you'll need that money in your retirement, you have lots of tolerance for risk, in that you really don't care what happens in the next 3-20 years, with markets swooning and diving and dancing all around. You are happy to just be long the market for a very long time. So maybe your entire portfolio is some index fund of small cap companies which pay no dividend, carry high P/E ratios, and should grow much faster than big, old, established companies. Your tolerance for volatility is big.
Now say hello to the 73-year-old you. You're starting to pull from your IRA. Your legal career has been replaced by a much better looking A.I.-driven robot. And you're...done. So you don't have the same tolerance you did before. In fact you have a fraction of it. You can't handle a down 40% market now, so you shift things around dramatically. Maybe your portfolio is only half equities or less, maybe a third, and those equities are probably old, stodgy dividend payers who don't really get crushed even in very bad markets, because their dividends so heavily cushion the fall. Maybe 1/3 is bonds, and the rest...maybe cash, or just short-term paper. Easy. No sweat. No worries. You'll have been handsomely rewarded financially for having been long the market for so long, likely with millions in savings and a long legal career you can look back on, and whimsically wish that you could have thrown a 100 mph fastball instead.
Related or Semi-related Video
Finance: What is risk?4 Views
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]
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