Chapter 2. Weighing Risks and Returns

In This Chapter

  • Determining risks

  • Reducing risk while earning decent returns

  • Figuring out expected investment returns

  • Determining how much you need your investments to return

A woman passes up eating a hamburger at a picnic because she heard that she could contract a deadly E. coli infection from eating improperly cooked meat. The next week, that same woman hops in the passenger seat of her friend's car without buckling her seat belt.

A young child is about to go for a bike ride when her parents notice that she left her bike helmet in the garage. The parents call the child back to put on her helmet. The next day, that same girl goes to a friend's house to play with a boy who finds his parents' loaded gun, even though his older brother is at home.

I'm not trying to depress or frighten anyone. However, I am trying to make an important point about risk — something that we all deal with on a daily basis. Risk is in the eye of the beholder. Many of us base our perception of risk, in large part, on our experiences and what we've been exposed to. Many people fret about relatively small risks while overlooking much larger risks.

Sure, a risk of an E. coli infection from eating poorly cooked meat exists, so the woman who was leery of eating the hamburger at the picnic had a legitimate concern. However, that same woman got into the friend's car without an airbag and placed herself at far greater risk of dying in that situation than if she had eaten the hamburger. ...

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