Does high risk equate to high returns?

By JOHNNY CARCIOPPOLO / Community Columnist

No matter what the venture, it seems that people who take the highest risks reap the benefits of high returns. You may have heard the comparison around risk vs. return several times in the past. But people take high risks all the time and lose a lot of money. So, is there truth to the concept of risk vs. return or is it just a bunch of hype?

Financial spin doctors love to interview high rollers on their shows. This makes it appear as though anyone willing to risk it big can come out a winner, like these guys did. One big problem with this is that many of these high rollers risked other peoples’ money. So, they really didn’t have much to lose. It would be great to see the profiles of their own portfolios and look into whether they carry the same kinds of risk. If you put money down, you will probably win if your bet is that they are more conservative with their own money.

The financial spin doctors want you to continue believing that you can shoot for the moon because their sponsors are the big Wall Street trading firms. If they can get you to believe that you can be a high flyer, you are going to risk your money in the markets and probably end up losing. You are just a number to these players. They just want your money. This game has been going on in financial markets for as long as they have existed. Create a buzz on an investment that gets everybody scrambling to buy, all while the big players have already left. The brokerage firms also win as they collect their commissions from both buyers and sellers.

There are occasions when making riskier bets can make sense, as long as you understand those risks and are comfortable with them. Having money management systems implemented with rules so you know when to get out is going to be a real help here. Money management can also keep you from putting in too much money on any one investment in the first place. This way, if the investment does go against you, it won’t wipe out your entire portfolio.

There is some truth in stepping up your risk will tend to increase the returns, all things being equal. But most average investors have very little knowledge of risk management and for this reason it’s important to tread lightly before investing in anything. If it seems too good to be true, it probably is.