Thursday, February 11, 2010
Risk depends on concern and time. If you are unconcerned about the future, or concerned about a loss of future value, you may prefer to consume rather than save, or save rather than invest, or prefer short term to long. If you are unconcerned with the present, or concerned about a loss of future income, you may prefer to invest rather than save, or save rather than consume, or prefer long term to short. These preferences are not fixed but will change with your position, your income and wealth, your attitude, concerns, and expectations for the future, including the expectations of others. Risk varies across assets as well as time and people can differ in their reaction to these different kinds of risk. Often it is not your perception of risk but your perception relative to that of the market that matters. Since income risks, sources, and sinks, range and vary over time, a diversified portfolio generally provides the best match.