Do I Need to Take More Risks to Earn High Rewards?

Illustration by Pratik Bhide for 1 Finance Magazine

Dear Qualified Financial Advisor,

I’ve never been a particularly adventurous person, and the same applies to my finances. I play by the rules and have a couple of investments in what I think are ‘safe’ options — like fixed deposits and gold bonds. With all the talk around wealth creation and compounding, I’ve started wondering if my approach is lacking in some respect. How will being averse to risk affect my financial journey in the long run? I don’t want to force myself out of my comfort zone and explore riskier investments — do I need to?

Yours, 
Cautious and Comfortable

Dear Cautious and Comfortable,

I get where you’re coming from. When I started investing, I only focused on safe options. I never understood the concept of risks and rewards, and I thought investing in stocks was like gambling. Until one day, when I decided to attend a financial planning seminar — that’s when I realised how much money I was losing by playing it too safe.

Real-world statistics and examples show that investing in risky assets can yield higher returns in the long run. For instance, the S&P 500 — a commonly followed stock market index — returned 14.7% on average annually between 2012 and 2021. 

However, it’s important to remember that investing is a personal choice. While some may prefer to invest aggressively, others may want to take a more conservative approach — both of which are valid.

To make any investment decision, you need to understand a few basics:

Risk and return are directly proportional. To earn higher returns, you must take greater risks. However, it is crucial to determine the amount of risk you are willing to take, after weighing the possible outcomes.

Diversification is key. Investing in different asset classes reduces the probability of losing too much money. This is important for risk management in finance.

It’s essential to measure your risk tolerance. An assessment of your risk tolerance can help determine the proportion of risk you should take with investments.

So, do you need to force yourself out of your comfort zone and explore riskier investments? Not necessarily. It comes down to what works well for you. But remember that diversification is crucial, and that you should be making investments with a long-term view. 

Yours, 
Viral Bhatt
Chairman, 1 Finance Advisory Committee for Qualified Financial Advisors — Mumbai Chapter