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Lesson 11. How to Pick Stocks > Determining Your Acceptable Level of Risk - Pg. 63

How to Pick Stocks 63 On the far left is the kind of return that is absolutely safe, such as putting the money under your mattress rather than investing it. Notice that this return is at the bottom of the risk indicator, or the left side of the table--this means no risk. Handling your money this way ensures that you will never lose it--at least not in the stock market. Notice also that the line is at the bottom of the gradual rise indicating return. This means there is also no return on your money. After all, mattress companies don't pay interest on the money you stuff into their products. You would be better off putting that money into the mattress company's stock. Here's the catch ... stock investments don't really work this way, not in direct correlation, anyway. There are those investments that have no practical risk to speak of. For example, if you invested in a U.S. Government Treasury bond, you would still earn a little interest, say 5 to 6 percent. The risk of losing your money would be little, if any, because those bonds are backed by the full faith of the U.S. Govern-ment. I suppose the U.S. Government could go out of business, but if it did, you'd have bigger problems than your investments to think of. So, you're making some return, with no "practical risk." In addition, stories abound about the other side of the coin: those highly risky investments that didn't pay off at all and that, quite truthfully, never stood a chance from the beginning. My brother hits me up all the time with such gems as a company that has developed the first oatmeal-powered car, the launch of television's 24-hour Golf Network, and instant beer (just add water!). Knowledge Reduces Risk The hard-and-fast rules of risk versus return aren't quite true. That being the case, it would appear that all bets are equal in the case of risk. A big, solid company might just skyrocket in value, while (quite often) a risky company goes out of business and its investors lose everything instead of making fortunes. Fortunately, this also is not the case. The power to determine risk isn't in any set