The deposits of private investors often consists of random securities, caused by tips of friends, banks and exchange newspapers. It is said that the ratio of risk and return cannot be optimal like this. Why?

Edit: Actually Nathan gave exactly the answer I was looking for. I'm not a native English speaker, so it is kind of difficult to refine this question, but I'd be most glad if someone more familiar with the language (and topic) could edit it.

  • 2
    You need to refine this question... it's not really clear what you're looking for. Sep 11, 2010 at 21:08

1 Answer 1


"Random deposits" are a bit like playing the lotery - especially if one is frequently chasing "hot tips". You might make it big, but the odds are vastly against you.

"Random" deposits into various investments won't be optimal, because such "random" decisions will not be properly diversified and balanced. Various investments have different rates of risk and return. "Random" deposits will not take this into account for an individual's personal situation.

In addition to needing to research individual investments as they are made, investments also need to be considered as part of a whole financial picture. A few considerations for example:

  • Do you have an appropriate emergency fund?
  • What is your risk tolerance? This will often largely be determined by when you are planning to retire.
  • What are the tax implications of an investment? These can in some cases greatly reduce your real return.
  • Are you primarily investing for income (focusing on dividends) or long term capital appreciation?
  • How will the investment affect your diversification? Too much exposure to one part of the economy can leave you vulnerable if economic situations change. (For example, if 90% of your portfolio was invested in oil stocks, and the price of oil plunged, you would be in big trouble. But if your portfolio was properly diversified, you would be in much better shape)

Simply put, random isn't a financial strategy.

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    Even worse, buying based on what's in the news or buzz will probably have you chasing stocks that have already run up -- so a portfolio constructed in this way will probably do worse than the market in general.
    – bstpierre
    Sep 12, 2010 at 22:21
  • 1
    Yes, usually the buzz is: "buy high and sell low"
    – mouviciel
    Sep 13, 2010 at 11:57

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