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Risk, Return, and Relationships
Have you ever been in a meaningful relationship with another person?
It could be a friend. Or a parent. Or a sibling. Or a significant other.
No matter whom you’re thinking about and how much you value your relationship with that person, my guess is that it’s not always rainbows and sunshine.
There are fights. There are disagreements. There are moments where you feel unsupported or abandoned.
You may even be able to remember an extended period of time where you didn’t really talk much or your relationship was more strained than usual.
But through it all, you’ve stuck with that person. And for good reason! Because the good times make it all worth it.
Sure, you could go through life by yourself and never risk the pain that sometimes comes from caring about another person.
But it’s those meaningful relationships that help you through the tough times and make the good times even better. It’s through those relationships that you figure out who we are, that you gain self-confidence, and that you live a happier life.
You accept the fact that there will inevitably be some heartache because you know the benefits are worth it.
Investing is exactly the same way.
We All Want Great Returns…
Just like with your relationships, you choose to invest because of the potential benefits.
You know that earning those better returns can make it much easier to reach your biggest long-term goals.
You also know certain investment accounts like a 401(k) and IRA have tax advantages that make it even easier to build your savings.
So investing sounds pretty good! It’s hard to imagine anyone who wouldn’t want those benefits.
…But We All Hate to Lose
The problem with investing is that, just like with your relationships, there can be problems along the way.
There’s no promise that you will actually get those 8%-10% returns. It could be better, but it could also be worse.
Those rough times aren’t easy. It’s scary to watch the money you’ve worked so hard to save disappear so quickly.
So wouldn’t it be great if you could get all the benefits of investing without the risk of losing money?
You Can’t Get Returns without Risk
Here’s the truth: When it comes to investing, risk and return are a package deal. You can only get the possibility of higher returns if you’re willing to take on more risk.
Now, there are some simple ways to minimize your risk and ensure that you’re only taking on as much as you need to.
But no matter what you do, investing with the hope of better returns always increases the chances that you won’t actually get those returns and increases the number of times your returns will temporarily be much worse than you’d like.
In other words, investing comes with a lot of ups and downs. And just like with your relationships, you have to take the bad in order to get the good.
Use This Information to Your Advantage
Lucky for you, while you can’t escape the fact that investing comes with risk, there are some simple ways you can use this information to your advantage and end up with more money in your accounts.
1. Avoid the Sales Pitch
There are plenty of people who are more than happy to sell you on the idea that they can deliver great investment returns without the risk.
Their sales pitches will sound good. Many of them will be backed up with lots of data and will look pretty sophisticated. And it will be tempting to believe them. After all, who wouldn’t want great returns without the risk?
Just know that unless they’re talking about simple things like asset allocation and diversification, they are absolutely full of it. Save yourself the money and pain and run away as fast as you can.
2. Risk Only What You Can
You don’t have to put all your money at risk when you invest. There may be good reasons to keep things safer and accept the fact that while you might not get rocket-ship returns, you will have a little more certainty about how much money you’ll have at the end of the day.
One reason to avoid risk is if you simply don’t need it. Let’s say you’ve run the numbers and you only need a 4% return to reach your goals. If that’s the case, why would you risk losing money in pursuit of 8% returns? It would make much more sense to keep things more conservative and increase your odds of reaching your goal successfully.
Another reason to avoid risk is if you can’t stomach it. Remember, you don’t have to put 100% of your money into the stock market. If you’re not comfortable with the wild ups and downs that would expose you to, you could split your money between stocks and a more conservative investment like bonds. This is called asset allocation and it’s a great way to manage risk.
3. Keep Calm. Invest On.
You know that close relationships with other people will inevitably lead to pain and heartbreak from time to time. And yet you still pursue them because the benefits are worth it.
In the same way, successful investors are the ones who recognize ahead of time that there will be bad days, bad months, and even bad years.
And instead of freaking out during those bad times and abandoning their plan altogether, they remind themselves that they knew this was going to happen. It’s just part of the deal.
So they stick to their plan. They keep saving. And they eventually reap the benefits.
You can’t escape investment risk, but you can learn to live with it. In fact, that’s the only way to invest successfully.
Matt Becker is a fee-only financial planner and the founder of Mom and Dad Money, where he helps new parents build a better financial future for their families. His free book, “The New Family Financial Road Map,” guides parents through the most important financial decisions that come with starting a family.