Investing for Dummies, 4th UK Edition

Chapter 4

Squaring Risks with Returns

In This Chapter

Working out risk and reward theory in practice

Deciding the level of gains you want

Calculating what you could get

Knowing about the advantages of diversification

Keeping an eye on how time works for you

When we walk down the street or drive a car, we’re aware of the risks. We know, for example, that we may risk life and limb crossing a road when the pedestrian signals are red. And we know that our safety (not to mention driver’s licence) is threatened if we drive 60 miles per hour in a 20 zone.

Granted, if we run helter-skelter down the street or drive recklessly down the road, ignoring everyone and every rule, we may arrive more quickly at our destination. But the faster we go and the more corners we cut, the greater the chance of losing everything. So generally we take simple precautions to avoid risks. That way, we make some progress through life.

But what if we never took risks at all and, instead, wrapped ourselves in cotton ...