Risk and Reward
“If riskier investments could be counted on to produce higher returns, they wouldn’t be riskier.”
The higher the risk, the higher the reward, but how can that be if we don’t know what will take place in the future? If we can’t count on future events taking place, then how can we count on high risk investments producing higher returns and vice versa.
The reality is that there are a set of potential outcomes at each time interval. It’s a dynamic system, so the probability of these outcomes are always changing as time goes on.
The vertical line across the risk/reward line shows the variety of outcomes that can occur at each time interval. We can’t know the risks prior to investing, so this graph is a better indication of what we are actually being presented with before the events occur.
Here’s a simpler way of looking at it: if you invested in something presented as “safe” but then lost money, it wasn’t that you took low risk and got low reward. It’s that your investment was high risk and low reward. You just didn’t know it.
