Last week, Felix Salmon commented on a story that appeared on WSJ about a GM bondholder. He makes a very keen observation on risk and reward in that post.
If you invest a large chunk of your 401(k) in the stock of just one company, your actions are fraught with peril. If that stock performs badly â€” which is always possible â€” then you could end up with a significantly diminished standard of living in retirement. But at least thereâ€™s a possible upside: if the stock does spectacularly well, you can end up in clover.
By contrast, thereâ€™s no reason whatsoever to invest a large chunk of your 401(k) in the bonds of just one company. You still have the same downside â€” the company can default on its debt â€” but thereâ€™s no upside at all: the best-case scenario is just that you muddle through getting your coupon payments until the bonds mature.
3 thoughts on “The Right Way to Look at Risk and Reward”
The only way that GM will survive is through government support and I agree… the money one had invested would be gone.
Putting everything into one company (if you don’t know what you’re doing) is indeed a risky venture and especially if it your retirement money you are playing with.
I see a lot of people talking about odds and say that there is a very low chance of that company winding so it doesn’t matter. Sure, there is a very slim change, but what if it happens? All your savings will be gone. Its not the same thing when you have all your eggs in one basket.