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 Do
you speak Riskese™? Residents of China speak Chinese,
residents of Japan speak Japanese, lawyers speak legalese,
and top-notch investment advisors, casino statisticians
and insurance underwriters all speak Riskese™. It
is the language of risk, return and time, also known as
risk management. If you don't understand it, then you should
just invest in Treasury Bills. They are risk free.
Risk, return and time are all intertwined.
Higher exposure to the right risk factors leads to higher
expected returns. The longer you hold a risky investment,
the more likely you will obtain the long-term expected
return. However, because of "random drift," risk
is very unpredictable in the short run, but it can be quantified
far more accurately than gut feelings and intuition in
the long run. For example, you can flip 10 heads in a row
with a coin, but there is still a 50/50 chance that you
will flip heads the next time and in the long run. Remember
that if there is no risk, there is no reason that you can
expect a higher return than Treasury Bills, which have
paid an annualized return of 3.8%/year for the last 70
years, just 0.5% over inflation.
High risk exposure is like a scream-inducing
roller coaster, with soaring highs and stomach churning
lows. If you do not like the the ride, you should get on
a milder one. On the roller coaster, the greater the ups
and downs, the greater the returns... measured in thrills.
The same thing applies to investing. However, not everybody
has the "capacity" for such "exposure" to
risk. In this step, we will show you simple charts that
explain the concepts of risk, return and time.
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Education
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