Risk and Uncertainty

Understanding investment risk and uncertainty are both important aspects of becoming a prudent investor. As a general proposition, let’s assume that “uncertainty” is a condition that makes individuals more scared of taking risk. When a child is uncertain about how the world works, he or she might be very concerned about what type of monster hides under the bed at night. Getting out of bed when the lights are turned off is viewed as a risky undertaking. As an adult with more experience and knowledge, such worries seem comical—however, to a child they are very real.

Fear, however, is no laughing matter. Uncertainty drives both adults and children to protect themselves by avoiding situations with which they are unfamiliar or uncomfortable. Investing often involves a fear of the unknown.

Lack of familiarity with financial concepts and technical jargon can make investing seem very risky. The less a person knows, the easier it is to imagine bad outcomes, and the more attractive a safe alternative like a bank account may appear. Equally worrisome, the less you know about a subject, the more reliant you become on trust. Can you trust the auto mechanic not to overcharge for repairs; can you trust your doctor to give you a correct diagnosis; can you trust a financial advisor not to recommend investments that only serve his or her self interest?

An American philosopher remarked that the only thing more difficult than making money was keeping it. News reports often tell the sad story of lotto winners who, just a few years later, are flat broke. Undoubtedly, these folks would have been better served by putting all their money into a passbook savings account, developing a budget for reasonable living expenses, and sticking to it. The moral of their sad stories seems to be that everything should be put into the bank—don’t take any risk.

When is risk avoidance the best course of action? Is there any course of action that is truly risk free? Is there a reason to put money “at risk” in an investment program? If yes, how much should be put at risk?

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This blog post is an adaptation of a similar post originally published on Mesothelioma Circle. Mesothelioma Circle is an organization focused on providing information and resources to victims of mesothelioma and their families. It is sponsored by Kazan McClain Satterley & Greenwood. Since 1974, Kazan Law firm has worked tirelessly to help the victims of asbestos exposure and mesothelioma.

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