When designing an investment plan, it’s crazy important to understand the relationship between risk & reward. The goal is to take an appropriate level of risk for the desired potential return, and not an ounce more. Not an easy task.
Think about risk and reward this way: If you receive aninheritance, it took no risk on your part (other than the loss of your loved one, of course), yet you reaped great reward. So, low risk, high reward, right?
If you play the lottery, chances are you’ll not get that buck back. So, the lottery is high risk with very low chance of reward. Which is why I’ve never bought a lottery ticket. I understand the appeal, but I just can’t make sense of it.
With investing, you need to first identify the returns needed to reach your goals. Then back into an appropriate level of risk with diversification as a guide. Again, not easy. But well worth it, no?