Key Investing Lessons: Risk Versus Reward

Having a diverse portfolio means more than just picking stocks from different sectors. You have to be willing to balance those big companies with more risky investments. That will depend a lot on your tolerance for risk, something your age should play a big part in. 

The younger you are, the more risk you should be willing to take when it comes to investing. Someone in their early twenties has another four decades to make money, as opposed to someone in their late fifties, who is gearing up for retirement. 

Peter Lynch, one of the greatest investors of our time, coined the phrase "ten bagger." This is a stock in which you make ten times your original investment. It sounds crazy, but actually these are fairly common in the world of investing. 

The problem is that you have to be willing to take some risks in order to get them. Not all your risky investments will work out. The great thing about ten baggers is that you only need one to make up for nine total duds if you split your investments evenly. 

Ten baggers are the stocks that can dramatically change your financial future and they're often sitting right under our noses. 

A great example is Apple. If those people who bought the first iPod had bought $399 worth of Apple stock instead, it would be worth $36,480 today. That's a ninety-bagger. 

Apple is still a great stock, but it will never reach that level of growth again. To get that kind of growth, you have to be willing to take some risks. 

Risk is the price you have to pay if you want those outstanding rewards. There are no safe growth stories out there; you have to be willing to take a chance on them when you see them.

TL;DR

• Risk is the price you pay for returns.
• A diverse portfolio should include some risky investments along with safer large-caps.
• The younger you are, the more risk you should be willing to take.