Do I Have to Take Risks in Investing to Make Money?

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risk, reward, investing, how to invest, how to retire early, early retirement, calculate risk, compound interestDo you consider yourself a risk taker? That’s a pretty broad question because there are many facets of risk all around us in our lives. Do you drink the water when you travel to Mexico? Do you like to eat blowfish sushi? If you answered yes to either one, some might say you’re a risk taker and others may say you’re not real bright.

So, if you are a risk taker in life, does that mean you are going to be a risk taker with your finances and investments? And will you stay that way through your entire investing life? For me at least, I’d say that risk in my daily habits or activities may be different from my risk tolerance in investing. I do like to do some things that many people consider to be risky. I’ve bungee jumped off a bridge, I’ve gone skydiving, and I regularly ride my bicycle on roads next to cars whizzing by me, but in my mind these activities are really not that risky and I am comfortable with the safety measures that are in place to protect me. Maybe I would call it calculated risk.

But with my situation, when it comes to investing, I don’t consider myself very risky, even though I’ve traditionally invested in what the fund industry calls “aggressive” profiles when I was younger. As I’ve aged and came closer to 40 years old (and then passed it), I’ve moved my investments to some more conservative asset mixes, so I definitely believe that your life circumstances can affect the level of risk you are willing to take.

Do you have to take risks to make money in investing? I say yes. It should come as no surprise that the more risk an investment opportunity has, there will generally be a greater chance of higher return/reward. And the opposite is true as well. If you don’t have to take any or very little risk, the return/reward will be low.

For example, if you invest in only government backed US bonds, the risk is low of default, however the return is also very low. If you investment strategy is trying to be free from risk, like in this situation, you may not even keep up with inflation, which essentially is like going backwards. And if you go to the other extreme and invest primarily in high risk junk bonds, penny stocks and the like, you could make some money, but you also run a risk of losing a considerable amount of your investment as well.

You’ve heard me mention it before and I’ll say it again, that balance is the key. Do stocks have risks, sure, but there are plenty of established stocks and stock mutual funds that can offer lower risk profiles. Notice I didn’t say “no risk”, but lower risk. The same could be said about bonds too, there are corporate or municipal bonds that have some risks involved but they can also be managed to meet the level of risk you are comfortable with.

When it comes to investing (and really business in general) there has to be some risk involved to get a reward. How you manage and balance the risk can make a world of difference though.