Investing: Risk-Reward Analysis

#risk #reward #investing

"There have always been two ways to gain wealth through investing: the long, slow, steady way that pays over time and the fast, easy way where you get rich quickly. If the 2nd way worked, everyone would do it" -- Paul Ebeling

Risk-reward analysis is at the heart of all prudent financial decision-making. It is good policy to base your money choices on what you expect to gain, measured Vs the risks you are willing to take.

Without risk, there can be no reward, but some people take chances where the potential gains and losses are so out of balance that the gamble simply cannot be justified.

There are safer, smarter ways to play each and every scenario, so consider the following before putting money down on a chance that is not worth taking.

Dos:

• Identify Threats. The 1st step in Risk Analysis is to identify the existing and possible threats that you might face.

• Estimate Risk. Once you have identified the threats you are facing, you need to calculate both the likelihood of these threats being realized, and their possible impact.

• Identify, measure, and mitigate various risk exposures or hazards facing a business, investment, or project.

Apply:

• Quantitative risk analysis uses mathematical models and simulations to assign numerical values to risk.

• Qualitative risk analysis relies on a person's subjective judgment to build a theoretical model of risk for a given scenario.

• Risk analysis is often both an art and a science.

Do nots: Use Home Equity as an ATM, Co-sign Loans, Chasing Huge Gains With the Next Big Thing, Picking Individual Stocks, and Quitting Your Day Job To Pursue Your Dream.

Without risk, there can be no reward, but some people take chances where the potential gains and losses are so out of balance that the gamble simply cannoy be justified.

Have a prosperous week, Keep the Faith!