I don’t think it’s useful to discuss rates of return without discussing Risk. Risk and rate of return are inseparable.
If you need to put money someplace and have at least that much available, (plus interest) in one year, you will get a low level of return (US Fed back CD’s are at 1% nominal). You do run a slight risk that the bank will default and the FDIC will default on its obligation to back its promises, but that risk is (IMHO) very very small.
If you want to try to make 25% return in a year, you can do some e things (become a loanshark seems like a picturesque example), but you run a risk of losing all or some of your money and/ or expected return (due to ignorance of the business, possibly).
Generally you hear that investing for long term gets higher returns, but really it’s being flexible about when you want to “cash out”. The longer the investment the greater your ability to be flexible. If we’re talking about investing for 60 years, and you’ll withdraw the money on April 7, 2073, you won’t be as successful that if you’re investing for 60 years plus or minus 10 years.
Oh, and “Investment” is a very broad term. “Securities” may be more appropriate to your meaning. And a discussion of investment risk should include the possibility that we’re living in a century long industrial revolution investment bubble.
Are you saying that you should look at the probability distribution of returns, rather than only the mean of that distribution? A 1.00 chance of a 1.0%-inflation real return is significantly different from a coin flip with 0.50 chance of losing everything and 0.50 chance of 102%-inflation real return, even though their expected values are equal.
Perhaps we should instead assign a utility function to rate of return; it’s entirely reasonable that the utility difference between a 500% return and a 600% return is much smaller than the difference between losing everything and keeping what you have.
I don’t think it’s useful to discuss rates of return without discussing Risk. Risk and rate of return are inseparable.
If you need to put money someplace and have at least that much available, (plus interest) in one year, you will get a low level of return (US Fed back CD’s are at 1% nominal). You do run a slight risk that the bank will default and the FDIC will default on its obligation to back its promises, but that risk is (IMHO) very very small.
If you want to try to make 25% return in a year, you can do some e things (become a loanshark seems like a picturesque example), but you run a risk of losing all or some of your money and/ or expected return (due to ignorance of the business, possibly).
Generally you hear that investing for long term gets higher returns, but really it’s being flexible about when you want to “cash out”. The longer the investment the greater your ability to be flexible. If we’re talking about investing for 60 years, and you’ll withdraw the money on April 7, 2073, you won’t be as successful that if you’re investing for 60 years plus or minus 10 years.
Oh, and “Investment” is a very broad term. “Securities” may be more appropriate to your meaning. And a discussion of investment risk should include the possibility that we’re living in a century long industrial revolution investment bubble.
Are you saying that you should look at the probability distribution of returns, rather than only the mean of that distribution? A 1.00 chance of a 1.0%-inflation real return is significantly different from a coin flip with 0.50 chance of losing everything and 0.50 chance of 102%-inflation real return, even though their expected values are equal.
Perhaps we should instead assign a utility function to rate of return; it’s entirely reasonable that the utility difference between a 500% return and a 600% return is much smaller than the difference between losing everything and keeping what you have.