The Truth About Investment Risks and Rewards
Written by
Martin Dasko
Edited by
Amber Barkley
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Investing can be confusing and intimidating, and doing your due diligence before investing your funds is harder than it sounds. How do you balance risk versus reward and find the best way to grow your money?
Here are five truths about investing risks and rewards that can help you invest with a little more confidence.
Volatility Isn’t the Same Thing as Risk
One of the biggest myths about investing is that volatility equals risk, but this isn’t the case, because market swings should be expected due to external factors.
“People often think that when the market bounces up and down, their entire financial future is on shaky ground,” said Tyler Meyer, CFP and founder of Retire to Abundance. “But the truth is, volatility is just a measure of short-term price swings — it doesn’t necessarily reflect the true risk of losing your capital.”
Meyer pointed out that real risk comes from losing your money permanently and not keeping up with inflation. However, one should expect to experience volatility, which is not as risky as you might think it is.
You Can Mitigate Risks With Proper Diversification
“By spreading your investments across various assets, sectors and geographies, you reduce the chances of one failure dragging down your entire portfolio,” said Meyer. “With proper diversification, even if one or two investments don’t perform well, the rest of your portfolio can cushion the blow and keep your overall wealth intact.”
In other words, putting all your funds into one investment is very risky — you could see great rewards if the investment does well, but if it does poorly, you could lose everything. That risk is mitigated by diversifying your investments over different assets and asset types. You might see a smaller reward if that one investment skyrockets and you’re not all-in, but you should still see growth overall if you’re properly diversified.
Anyone Can Access the Rewards
Anyone can start investing — and reaping the rewards — these days without a significant amount of capital or any kind of financial background.
“One common misconception about investing is that it’s only for the wealthy,” said Uziel Gomez, a financial planner and founder at Primeros Financial. “While this may have held true in the past, today there are numerous platforms that enable anyone to start investing with as little as $5.”
Many platforms offer fractional shares of stocks, so you can invest in a company even if you can’t afford the shares, as well as robo-advising services that can efficiently handle your portfolio, meaning you don’t have to spend money on hiring a professional financial planner.
Investing Isn’t Gambling
Another common myth about investing is that it’s a gamble, and you could lose all your money. While risks will always be associated with investing, and you could lose money on a bad investment, it’s not a gamble if you invest wisely.
Gomez said, “While it’s true that the stock market fluctuates and carries inherent risks, investing involves much more than chance. It requires research, strategic planning and thoughtful decision-making — unlike the experience of walking into a casino and betting on a specific color.”
If you’re worried about investing because you don’t want to take on the risks to receive the rewards, you can always start with an index fund, which have diversification built in to protect your capital.
The Rewards Are an Important Wealth-Building Tool
“The surest way to build true long-term wealth and higher net worth is to invest in the stock market,” said Robert R. Johnson, Ph.D., professor of finance at the Heider College of Business at Creighton University. “Starting early is the key to successfully building wealth because of the effect of compound interest.”
While embracing frugality and finding ways to save money will be extremely beneficial in your financial journey, you can’t just focus on saving if the goal is to build wealth. You’ll have to invest and take risks if you want noticeable rewards.
Johnson added, “The truth is that the stock market is a positive sum game and is set up for people to win. They simply need time and to exercise patience and discipline. It’s actually an easy game to win.”
It’s worth pointing out that the risks can often be worth the rewards when investing your money. You also don’t have to invest in the stock market if you want your funds to grow — there are numerous ways to grow your capital, from getting into real estate to starting a business. Find a way to invest your money where you feel comfortable with taking on the risks for the potential rewards.
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