The Epic Battle Between Risk and Return

What’s a professional investment manager and a huge meathead at the gym have in common?

No pain, no gain! The buffed out beefcake wears this message on his muscle shirt, and the investment guy has this message in his brochure.

No pain, no gain! In essence, if you want to do well, there is going to be some pain involved. As an investor, the gain is, of course, making money, and the pain is losing money.

Here’s how it plays out, at least in theory.

The more investment risk you take, the more money you can make. In other words, if you are willing to invest in things that are quite volatile and could lose money, those same investments are the ones that could probably go up in value the most.

On the other hand, those investments that are more stable and have less risk of crashing probably won’t shoot up in value overnight.

https://youtu.be/d3cM83ELkf0

“The more investment risk you take, the more money you can make.”

Generally speaking, risk and reward are connected when it comes to investing.

Small cap stocks are more volatile and have a greater chance of losing money, but historically, they also have made a better return than larger company stocks.

Or take high yield bonds. Do you remember these? These are bonds that pay out a high interest rate, also called yield. Why do they pay a high interest rate? It’s like lending money to a friend who is broke and out of work. There is a much greater chance you won’t get your money back.

What’s the lesson here?

The big lesson here is when you see that such and such investment is projected to produce a 15% return when everything else is projected to produce an 8% return, you have to ask yourself, “How?” Higher return, so they must be taking more risk.

I’m not saying the investment is good or bad, but start thinking in terms of how higher return means you are taking more risk. If you do invest in this investment, would you want half of your money in it or maybe a smaller amount knowing that this is much riskier? Yeah, you’d probably want a smaller amount.

In the next lesson, I’m taking the gloves off. If you really want to get rich, stick with me. I’m going to show you how to become a millionaire almost instantly. Are you ready?

The proceeding blog post is an excerpt from Get Money Smart: Simple Lessons to Kickstart Your Financial Confidence & Grow Your Wealth, available now on Amazon.