Many hyperlinks are disabled.
Use anonymous login to enable hyperlinks.

Artifact ID:	3a508416408152f1636666a8bf6e4fd4afea246e7be1b974a7f7a5c7ad191821
Page Name:	RiskVsReward
Date:	2021-06-13 02:30:15
Original User:	zie
Parent:	559b1ec75cea2bf2d7848c87722a45293d5801ed9d5abd0a32fec4ea7bbb56f4 (diff)
Next	1648b157a9c497ab4175a35d83af797b0025aacfde1600a864084243431a8afe

When it comes to Investing, we should talk about risk vs reward.

YOLO

If we are truly YOLO'ng, then we should go for the largest reward and ignore the risk?

So, we should do something epic, like rob Fort Knox. Ft. Knox https://www.usmint.gov/about/mint-tours-facilities/fort-knox 147.3 million ounces of gold.

147.3 million ounces * 1880.15 USD per ounce = $276,946,095,000 USD.

That's about 277 Billion dollars. That's more than Jeff Bezos or Elon Musk. Of course the worst case risks are death or life in prison with a severe disability(getting shot and permanently injured).

Obviously all sorts of illegal things can get you basically the same risks, with probably less reward. If you are willing to accept these risks, then have fun, though I don't wish you luck.

If that's not your cup of tea, then, let's try something a bit more legal.

Entrepreneur

You could be an entrepreneur, and go forth and try to be the next Bezos, Musk or Rockefeller. The risks are much less dire, the consequences might be as bad as being very in debt, ridiculously less risky than robbing Fort Knox.

Obviously this isn't for everyone, and very few succeed to the level of Musk/Bezos, etc.

Concentrated Stocks / Gambling

Let's get into investing now :) The more concentrated your stock position, the high the risk and higher possible reward. Of course the worst case is the stock goes to zero and you lose your investment. Compared to the YOLO option, this looks positively awesome! and compared to the entrepreneur, you end up at zero, not ridiculously in debt(unless you borrowed to invest in the stock, then the risks are basically the same).

Note I also said Gambling, and while Gambling is more risky than say a 1 stock portfolio, they are mostly equal. The best case scenario in gambling is a 50/50 chance. Any given stock is well less than that. Of the some 4k publicly traded stocks in the US, roughly 20% of them account for all the gains. So you have roughly a 20% chance of winning best case. Or roughly 800 stocks out of the 4k account for basically all the gains in a given year.

In 2020, NVAX had a 2,549% growth year. $10,000 in NVAX invested Jan 2020 would be worth $280,176 Jan of 2021, 1 year later. Of course who had any idea in Jan of 2020 that a Biotech Vaccine company would be the giant winner a year later? In March 2020, of course, but in January? Nobody.

So maybe gambling is better than investing in stocks.. 20% winning odds are pretty terrible.

100% Stocks

Of course there is another game in town, just own all the stocks. If you do that, historically you get about 10%/yr growth(https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&mode=1&timePeriod=4&startYear=1972&firstMonth=1&endYear=2021&lastMonth=12&calendarAligned=true&includeYTD=false&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&portfolioNames=false&portfolioName1=Portfolio+1&portfolioName2=Portfolio+2&portfolioName3=Portfolio+3&asset1=TotalStockMarket&allocation1_1=100&allocation1_2=60&asset2=IntlStockMarket&allocation2_2=40). Of course there is risk.

The risks:

* Market risk or the global market closes and you lose all of your investments risk. If the global stock market(s) close, chances are the world is on fire and money doesn't mean anything anyway. there are plenty of doomsday scenarios to make you sleep poorly, but I still think this is mostly a non-risk, there is nothing you can do about it, and money under your mattress or in a bank won't help you either.

* Volatility risk. That is, the risk of a 50% market crash right when you need the money. If you are investing for retirement and it's 50 years down the road, who cares? If you are 10 years from retirement, then you definitely should start to care about volatility.

* Country risk: Historically the US stock market has recovered in under 10 years. Japan's current crash started back in 1989 and still hasn't recovered as of Jan 2021. It's possible it will reach 1989 peaks in 2021 and if that happens it will be 32 years to recovery. Most other stock markets have recovered in < 20 years. Globally the longest stock recovery was Japan at 17 years, Italy at 16 years and Germany with 12 years, all these crashes because of losing world wars. This is why 1 country bias probably isn't so great. The US Market has been the dominant winner this century, but that doesn't mean it will forever win, England's stock market was the global winner for a long time before the US(It started in the early 1700's before the USA existed).

* Are there any other risks? I welcome feedback.

So just own the about 9,000 publicly traded stocks in the world with something like https://investor.vanguard.com/etf/profile/vt (Though in Taxable accounts for US investors I recommend holding the constituent parts, roughly 60% VTI and 40% VXUS for tax reasons).

There are great ways to handle Volatility risk(like owning safer assets also), but that's a different topic.