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Why Investment Risk Doesn’t Always Equal a Reward

Build your investment strategy with sound advice.

Does taking a higher risk with your investments guarantee a higher return? Most people seem to think so.

Teachers Insurance and Annuity Association (TIAA) posed that very question in a survey, and 53 percent of the respondents answered “yes.”

They’re wrong, of course. A higher risk guarantees only one thing: higher risk. (You might get higher returns from taking higher risks, but it’s far from guaranteed. Just ask anyone who’s ever bought a lottery ticket.)

If high risk can’t be relied on to produce higher returns, what can be? Well, 36 percent of the respondents in TIAA’s survey said the answer is found in how an investment performed last year.

Unfortunately, that doesn’t work either. Investments that perform best in a given year almost never perform as well in the following year. (If they did, the same investment would be best year after year. There would be only one investment, and every investor on the planet would own it.)

This is why developing a sound investment strategy is such a highly complex undertaking. It’s also why so many consumers turn to professional financial planners like us to help them.

And yet nearly 30 percent of those surveyed who said they want to do a better job of managing their money didn’t include financial planning in their strategy. They said they “don’t make enough money to worry about it,” according to Allianz, which sponsored the survey.

Their view is wrong, of course: The less money you have, the more important it is to manage it effectively! (We can agree that Bill Gates can squander some of his money foolishly with no adverse impact on himself or his family. But that’s not the case for someone earning $50,000 a year.)

Fortunately, many respondents said they were open to getting help with their financial decisions. Good financial advice that’s in your best interests isn’t free, of course, but the cost should be compared to the long-term benefits the advice can provide.

If you have family members or friends who are looking for such advice, let them know we’re glad to help.

Talk with a Financial Advisor

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