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Guaranteed Vs. Risky Investments

UserPost

10:22 am
March 5, 2013


josht

Member

posts 7

Would you rather have a lower,  but guaranteed interest rate (say 3-6 percent growth), or would you rather have the potential for growth with the risk of loss (-15 – +15)?

10:53 am
March 5, 2013


cheapstudents

Member

posts 44

I guess it would depend on whether you have long or short term goals. But that's completely my personal opinion.

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11:37 am
March 5, 2013


Edward Antrobus

Fort Collins, CO

Member

posts 1008

Personally, I have a low stomach for risk. I understand more risk means more potential gain, but I'd prefer the guaranteed return myself.

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1:59 pm
March 5, 2013


josht

Member

posts 7

Good point cheapstudents. I was thinking more long term…

5:46 pm
March 5, 2013


michael @ financial ramblings

Member

posts 196

Not enough info given.

What is the expected rate of return in the latter case? You're promising 3-6% growth in one case and promising the potential to go up or down 15%. Looking across a one year timeframe the stock market could, in the extreme go up ca. 60% or down as much as 50% (based on history). But the expected annual return based on historical averages is 8-9%.

Given a long enough timeframe, I'd gladly take expectation of 8-9% returns while risking extreme short-term fluctuations — even more extreme than your +/- 15% scenario.

Back to your question… Is there an equal likelihood of +/- 15% (in which case we might expect returns to average 0%)? Or something else?

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