How risky is it?
Risk is often defined as the probability of incurring a loss or some other type of negative consequence. But there is a difference between perceived risk and real risk.
Classic examples of real risk vs. perceived risk are the risks associated with both driving a car and flying in a plane. The odds of dying in a car crash are MUCH higher over your lifetime than the odds of dying in a plane crash. (For a variety of reasons.) But very few people panic before they get in their car or refuse to drive. Significantly more people either avoid flying altogether or are white-knuckle fliers.
Real risk is how likely you ACTUALLY are to experience a negative consequence. Perceived risk is how likely you THINK or FEEL you are to experience a negative consequence. Perceived risk doesn’t have a whole lot to do with real risk — except that what you think or feel can cause you to change your actions.
This is why it’s important to identify and separate out both types of risk when investing or choosing a place for your money. For example, your money might FEEL safer under your mattress, but if something happens to it, it’s gone for good. And it’s guaranteed that you’ll be able to buy less with that money each year due to the eroding factor of inflation. So your money probably actually IS safer in an interest-bearing, FDIC insured account. In other words, the likelihood of the government collapsing is less than the likelihood of your money being stolen or damaged while in your house.
When you identify and separate out both types of risk, you give yourself a better chance of success in your investments. You’ll be less likely to invest in things that SEEM safe but actually aren’t, or to panic and take your money out of things at inopportune times. You’ll also be able to go into situations with an awareness that you might not otherwise have had. This awareness can help you to see things more clearly.
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