When it comes to building companies, I've rolled the dice with millions of dollars.
But when it comes to buying lottery tickets, I'm about as risk-averse as they come. For me, even a $1 Powerball ticket is far too risky a bet on a long shot with odds of 195 million to 1.
Doesn't make sense? Think of it this way: If you had a 90 percent chance of making $1 million on a $100,000 investment and a 10 percent chance of losing the whole thing, would you put your money in the deal? What if I told you that you had a 90 percent chance of making 5 percent a year on your investment and the risk of losing your principal was zero?
Believe it or not, most people would rather take the second bet. That's right. They'd trade the possibility of making 10 times their money for the guarantee that they'd never lose a dime. Because even though most of us will buy a lottery ticket when there's a really big jackpot on the line, we don't want to risk our hard-earned savings on an investment we may never see again.
That's why, before you put your money into stocks, bonds, mutual funds, gold or real estate, it's important to know how big a risk-taker you really are. Remember: Just because you're comfortable rolling the dice on the investment you know the best--your business--doesn't mean that you should take a flyer on foreign currencies or distressed corporate debt.
Recently, I came across an interesting investment quiz compiled by two college professors, Dr. Ruth Lytton at Virginia Tech and Dr. John Grable at Kansas State University at http://njaes.rutgers.edu/money/riskquiz/. In the quiz, they ask questions like this: You are on a TV game show and can choose one of the following. Which would you take? a) $1,000 in cash, b) a 50 percent chance at winning $5,000, c) a 25 percent chance at winning $10,000, or d) a 5 percent chance at winning $100,000. The two professors also test investors' levels of fear and greed by asking them how much they're prepared to lose in order to win a certain financial jackpot. Based on your answers, they score your risk tolerance and provide a list of investments (from low-risk/low-return vehicles like money market funds to high-risk/high-return investments like penny stocks and emerging markets funds) ranked by risk and return.
Which brings me back to my lifelong aversion to lottery tickets. I'd rather put $1 million into muni bonds that kick off 5 percent annual interest than risk $10 a week on lottery tickets knowing that it's probably money down the drain. For me, that $50,000 a year in guaranteed triple tax-free income is worth more than the chance of winning a $50 million jackpot. For you, it may be different.