In this post, we're going to be addressing the paradigm of "increase your risk and you'll increase your returns." This gets thrown out a lot, like all you have to do is just be riskier or take more risk, and you'll get a greater yield or rate of return for your money. This always has kind of rubbed me the wrong way because there are risk assessments that people will take when it comes to analyzing their investments. Essentially, if the more risk that you're willing to take, the greater the rate of return you'll make in the market versus the less risk you are willing to take, the less rate of return you'll make in the market.
While I can understand this concept when it comes to things like indexes and the stock market, where you put your money in equities versus a bond portfolio, this phrase gets thrown out a lot. And really, we as investors, people that want to be intentional with our money, need to challenge that and ask ourselves: what is the definition of risk? Why is this the way it is?
"One of my favorite definitions of risk is increasing your chance of loss."
Let me say this another way: You increase your chance of loss, and you'll make more money. I find that extremes highlight a point. For example, those of us familiar with the crypto market know there are many crypto scams out there. You could say it's very speculative and risky, like penny stocks where your money could go to zero, but you also have that chance of hitting it big. That feels more like gambling to me.
We wouldn't say while driving a car, "increase your chance of loss, but you'll get there faster." You might get there faster one day by going 200 miles an hour, weaving through traffic, and reaching your destination faster, but there are so many risks involved like dying, crashing, or getting a ticket.
Redefining Risk
Instead of increasing your chance of loss, what if we redefined risk? What if we asked ourselves: how can I limit my downside? What can I limit in risk to get the same result?
For example, I have a good friend who is incredibly good at option trading and has made a ton of money doing it. For him, what some people would call day trading or trading options is not risky because he's a professional at it and is able to make a great rate of return. Does that mean everyone should learn how to trade options? Not if you're not willing to put in the time to learn.
The Role of Specialized Knowledge
The same thing goes with real estate. A lot of people might read Robert Kiyosaki's books and think, "I want to be financially free, I'm just going to go buy real estate," thinking money will just start flowing in. There may be nothing wrong with that, but there's a difference between someone who can't swing a hammer and someone who knows the game, has done it before, and is working with professionals and understands contractors.
The purpose of this video is to challenge the notion that increasing risk leads to a greater rate of return. We're very much discounting the specialized knowledge that needs to happen as it relates to becoming wealthy and financially free.
Instead, ask yourself: what specialized knowledge, or who do I need to know or be connected to, that can limit the risk and give me more upside by reducing some of the risk? Some of the best investors in history aren't so focused on getting a greater rate of return; they're trying to get the same rate of return the market does but limit the risk, limiting the downside, and as a result, creating more certainty and better results for their investors.
It's something to think about. Risk is everywhere, but if we really look within, we are unique. Some people you know and your specialized knowledge could eliminate some of that risk. As a result, that's where you might want to consider putting your time and money into.
Where Should You Invest?
This answers a second question that a lot of people ask: where should you invest your money? While this is not investment advice, and please don't sue me, feel free to leave nasty comments below if you disagree with what I'm saying. I would just encourage you to look at yourself and consider where you find a lot of fulfillment. Where do you have specialized knowledge? Do you know people that have that knowledge, and where can you invest your time and money to achieve the results you want by leveraging your connections and network to limit downside?
If you find something like that, you will gain momentum and likely achieve better results than the average investor who merely takes a risk assessment and follows the test's advice, outsourcing their wealth-building.
