Risk vs. Reward – Lessons from our Financial Mess

As I’ve invested money over the years the concept of risk vs. reward has been drilled into me. The larger the risk I choose to take, the larger my potential reward, or potential loss. I choose to invest fairly conservatively. I have some stock mutual funds, the majority of which are in large capitalization or blue chip companies. I do have some riskier small-cap choices too. But, that’s as far as I’ve gone.

Other investors chose to put money into far riskier ventures: mortgage backed securities, credit default swaps, or hedge funds that invested in these kinds of things. They earned hefty rewards while times were good. I saw none of that money. When those investments soured recently, I’m sure many of those investors took a substantial loss. Here’s the rub: so did everyone else.

If there are lessons to be learned in the latest financial mess it is that all of us are vulnerable to loss at the hands of relatively few very large, very wealthy investors. We don’t share in their rewards, but we do share in their losses. I, and most of my acquaintances, did not knowingly choose to take on the risk inherent in these derivative investments, but we certainly paid a large price for their devaluation.

That is what is so unfair about this latest setback. If there were some regulatory method that would confine the losses to the people that actually, knowingly signed up for the risk, I would be 100% for that. I’m not smart enough to know how to do that. I do think many people are angry. They are angry because a relatively small number of people prospered hugely when these investment vehicles were producing returns. When those same investments tanked, it took the rest of us down with them.

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