Risk vs. Reward

Evaluating Risk vs. Reward is not always as easy as it seems. Draw a graph with "Risk" on the vertical axis and "Reward" on the horizontal axis. Draw a line from the point where the axes meet up at 45 degree angle. Extend the line past the limits of the axes, swing it around some, and draw a few teeth. Work this into a pretty fair rendition of Godzilla, and you'll have something just as useful as the typical concept of "Risk vs. Reward." But, if you get good at it (try the "Draw Skippy" contest frequently found in the front of TV Guide) and you might make some money.

The gamut of risk is wide, folks, and not all that is risky is potentially rewarding. Also, not all that is rewarding is commensurately risky. For instance: Is it possibly to achieve greater than 20% per year without betting the ranch? Yes -- effective covered call writing has been known to return numbers like this, yet lessens risk at the same time. Also, those who place all their hopes on stock doubling or tripling are taking a grossly unnecessary risk, easily mitigated by diversifying. Since their are 15,000 US equities listed on the exchanges, certainly there has to be at least three of everything ... including whatever one considers a "good buy."

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