Scenario: Jack considers an investment
Jack’s trying to decide whether to invest in his friends’ new start-up company. Given his situation, which choice do you think is best?
Jack is off to a good start financially. He has minimized his expenses, built up his savings, and recently started to invest. Some friends of his have a fantastic new business idea and have asked him to invest, but don’t have a business plan yet. He’d have to quickly sell the investments he’s made so far to give them the money they need. His investments are low-risk but haven’t earned much. Is this his chance for a huge profit?
The consequences of your choice
See the consequences of this choice for Jack. Then hear what your guide has to say.
“I believe in my friends. Even though I had to pay some fees and also took a loss on a couple investments I sold, I invested everything with them. Now I’m not sleeping real well. Maybe my other investments were too low risk/low reward, but this one’s just too high-risk for me. They’ve already spent most of my money, so it’s not like I can get it back right now.”
Sorry … not great advice. It’s important to decide how much risk you’re comfortable taking. Overreacting to “hot” investment opportunities can put you in danger of losing your money. Dividing your money between different types of investments, called diversifying, is a good way to reduce your risk.
The consequences of your choice
See the consequences of this choice for Jack. Then hear what your guide has to say.
“I’m glad I kept my other investments, but what was I thinking taking a cash advance on my credit card? What a lame idea. I have to pay a huge amount of interest on the loan, way more than the return I might get on my investment. And if I can’t pay it back, I’ll damage my credit. So now I’m more focused on paying off a debt than I am on investing. And who knows if and when my friends’ business will earn a profit?”
Keeping his investments was a good idea, but the cash advance was definitely not! This advice put both Jack’s money and his credit at high risk with no guarantee of reward.
The consequences of your choice
See the consequences of this choice for Jack. Then hear what your guide has to say.
“This seemed like a ‘once-in-a-lifetime’ opportunity. Then I remembered that if something sounds too good to be true, it probably is. My friends are really psyched, but they don’t even have a business plan yet. I might be willing to take a little more risk for more potential reward, but I’m going to stick to my plan to divide my money between different types of investments, companies, and industries.”
Good advice! It may have been hard for him to take a pass, but Jack made the smart choice. He’s controlling the amount of risk he wants to take. Dividing his money between different types of investments, called diversifying his portfolio, is a good way for him to cut his risk.
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