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Careful with Those Risky Investments

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Why Risky Investments Pay More

Risky InvestmentsThe whole stock market is driven by risky investments. Some people mistakenly believe that investments only date back to the early 20th century or some similarly recent era. People have actually been investing in other human endeavors since ancient times. Roman financers invested in trading ships that sailed away to Egypt or to India. Some of them did not come back. The ships that successfully navigated the risks of the ocean brought back untold wealth for their investors.

 Risky investments pay off because of the inverse relationship between the likelihood of success and the potential rewards of that success. When you invest in a company whose stock price has fallen due to bad behavior or missed opportunities, you sink your money into a ship on its way down. Because people assume that the company will sink, the stock price has plummeted. If the company manages to right the ship, the stock price will rise again. Your risky investment will bring you a great return because of the difference between the final value and the lower value when the risk was high.

 How Risky Investments Can Hurt You

However, if all fairy tales came true, there would not be any risky investments. If success were guaranteed, there would not be a price for the stock because no one would sell a guaranteed winner. Instead, there is a good chance that risky investments will fail.

If you take your chances and your risky investments fail, they will take your money down with the sinking ship. There is often no remedy for fallen stock prices. Your money is simply gone. It has winked out of existence. That is why you must never have more than a small percentage of your stock portfolio in risky investments.

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