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Chapter 6. Understanding and Managing Ri... > The Third Dimension of Investing: Ch...

The Third Dimension of Investing: Changing Lenses

We have to look at risk from a three-dimensional point of view on any possible investment. In order to understand this, you need to first grasp the concept of each dimension or factor. The first dimension (see Figure 6-3), the horizontal axis of the illustration, shows time. Regardless of what we do, time marches on. This is not a dimension that we can control directly or indirectly. The second dimension, the vertical axis, represents value. Value is the result of the impact of the third dimension over any period of time marked along the horizontal axis. What I'm suggesting is that the third dimension is a series of factors that determine the rate of growth on your investments. These factors can be simple or complex and create varying degrees of risk. Imagine each factor as a layer of risk that impacts value over time. If you could peel back a layer, you could see the role that specific factor plays in determining the performance of an investment.

Figure 6-3. The Dimensions of Investment



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