By Professor Ricardo “Rick” Ulivi, Ph.D.
There are two very important investment objectives, yet they are contradictory. If preservation of capital is important for you, you can’t expect to make your principal grow at an attractive rate of return. And if you want to make your principal grow, you have to be willing to accept losses of principal.
Most people are risk averse, yet when an investment with an attractive expected rate of return is waved in front of them, they’ll often forget that preservation of capital is their most important objective. And here is where mistakes are too often made; risk averse individuals yield to the temptation of high returns, and they end up making investments they never should have made in the first place. When the losses actually occur, deep regrets come alive, making one’s life more difficult both financially and emotionally.
A risk taker, on the other hand, will rarely experience regret if a tempting investment results in a loss; he/she was willing to accept that these things can happen, and so they tend to be more at peace with themselves if losses actually occur. They will move on to the next investment, a habit that may result in not only recuperating the earlier losses, but also earning profits way ahead of those experienced by risk averse individuals.
Some people experience the regret of a loss, not so much for an actual loss, but for having passed up an opportunity that resulted in a gain. The missed opportunity causes regrets.
The healthiest approach is to clearly understand what type of investor you are–risk averse or a risk taker? Once you determine this, proceed accordingly. Just remember, when investing, you can’t have your cake and eat it too. You need to decide what’s more important for you, and stick to that objective.
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