High Risk = High Return – Truth or Fallacy?

Ever hear the saying that high risk equals high returns? Did you hear that from a financial planner? Oftentimes certain financial planners will attempt to ascertain a person’s risk tolerance. If they conclude that a certain personality has a high risk tolerance, which means they are comfortable with losing, so they have the capacity needed to invest in high risk investments. This, the advisor tells the client (or potential client) will then lead to higher returns in a shorter amount of time.
Is this truth or fallacy? Or better yet, is this the best route for you in living out your best RichLife?
First of all, is risk tolerance truly measurable?
Secondly, can the risk of any investment be precisely measured?
And last of all, can the returns of any investment be guaranteed over time?
Stop and think – is there any absolute proof that taking a higher risk will bring a higher return? If indeed a higher return were guaranteed, then would it be a risk at all?
In spite of this faulty reasoning, I see many people choose investment portfolios based on this belief that they can build their net worth faster by taking higher risks.
In essence, the idea of high risks equals high returns is setting you up to expect to lose. The proponents of this reasoning will go so far as to suggest that the younger you are, the more risk you can tolerate. Translated that means that you can lose more when you are young, because you have more years to “catch up” before retirement. Again, you are lulled into thinking that it’s okay to be in a losing position, because you can always make it up again.
A better approach to investing, in my opinion, isn’t the size of net worth, or how fast it can be accumulated, or the state of your tolerance for risk. A better approach is to know why you are investing in the first place. What is your life purpose? How does it relate to the goals of your investing pattern?
Here’s a quick example. Let’s say there was a product that would give me 6% growth and I planned to retire in 10 years. Let’s say further that I know (by my own research) that 6% will give me the balance that would provide the income needed for the rest of my life.
But then I get sidetracked and hear about an incredible opportunity to earn 20% from a certain investment. That sounds much, much better than 6%. Yes, there’s a risk involved, but it I’m ready to take the risk in order to reap the huge dividends. I take a big hit and it’s all out the window.
Rather than using a trite and worn out cliché as your investment standard (high risk equals high return) I suggest you use the equation Wise Risk = Safe Return when it come to your dreams, visions, plans and purposes as your investment standard. Only then will your investments make sense for you! Only then will you move toward living your RichLife.