Take More Risk to Earn Greater Returns
By Bigg Success Staff
06-10-08
Bigg Success with Money
There’s something that men seem to do better than women – accept more risk to earn a higher return.
Now granted, anytime we stray into generalizing about the sexes, or any other group, we risk over-generalizing. But long-standing research seems to support this notion.
Women may be too risk-averse. One of the basic tenets of modern financial theory is that taking greater risk should lead to greater rewards. Granted, it may be a rough ride with more volatility, but in the end it pays off.
Especially if you’re investing for the long-term.
Research shows that risky assets (e.g. stocks) overcompensate for the risk taken over long periods of time (e.g. five years). So if your investment horizon (i.e. the time before you’ll need the money) is five years or more, you can probably afford to accept more risk.
It can make a bigg difference. For example, let’s say that one 22-year old new college graduate invests $500 a month in stocks while another invests only in treasury bills. It’s not unreasonable to expect a 6 percent premium per year, after inflation, for the stock investor.
What’s the difference if they both retire at 65?
Over $1.2 million!
This figure is based on commonly reported historical returns. If anything, it’s understated based on historical standards, but hopefully the $1 million difference gets your attention anyway!
It pays to take some risk if time is on your side.
Hear today's lesson and laugh on The Bigg Success Show.
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