Archive 2008 - 2019

Risk vs Reward - Increasing the Divide

by Peter Liffiton, P.E.


When investing, and for that matter in life, there is a concept that the more risk you are willing to take the greater the reward.  For mountain climbers this means taking the hardest climbs to see the world from the very top.  When investing, more risk might mean buying a stock that pays a big dividend, but risking that the company may lower the dividend or even go out of business.  Low risk in investing is like buying a ten-year maturity US Treasury bond that will only pay 2.48% a year, but will never go out of business.

This risk/reward concept is further dividing investors between those who can afford to take more risk (read "wealthy" people) and those who have funds to invest but cannot afford to take more risk (read "the middle class"). 

The risks in the market are surely higher than in past decades.  When companies that previously seemed invincible lose over ¾ of their value (see General Electric moving from $41 per share in 2007 to $7 per share in 2009) the risk side of the equation grows to perilous levels.  Those who could afford to risk it bought GE at $7 and doubled their money in less than a year.  Those who couldn't afford the risk bought US Treasuries and earned from 3-4%.  So the divide between the "wealthy" and the "middle class" continues to grow.

Some theorists try to put buying a house into this same risk/reward concept, but it just isn't valid.  Buying a house for most people is not simply an investment; it is a place to live, a home.  Even when bought as an investment, it should be seen as a very, very long term investment subject to ups and downs but, over the long term, mostly up or at least even.  One buys a house in lieu of renting, and renting is certainly not an investment; it is simply an expense.  Traditionally, buying a house was less expensive and a better financial decision than renting.  In today's economic climate, however, that traditional advice is being called into question.