Is it true that the higher the risk of investment, the higher the returns and yields?

Question

Im a small investor? Is this saying true to corporate and individual investors?

Answer 1

If you overpay for an investment, then you are usually taking more risk than you have to for a lower return. If you are paying huge loads (commissions) for mutual funds, or if you get involved with something you haven't researched or understood, you may well be taking more risk than you should for less return.
Corporate investors usually have spent a lot more time studying investments, so they are less likely to overpay for something they haven't done enough homework on. From many years of watching message boards, I can tell you that individual investors usually know far less than they give themselves credit for. Corporate investors have professionals who understand the proper level of due diligence.

However, getting away from mistakes from not having done enough homework...are there ways for people to get higher rates of return while taking less risk? Finance has what is known as efficient market theory, which basically says all assets are properly priced, and you can't get an edge, no matter how much research you do. Most of the financial world says this is true...there are a few who think these folks are nuts. Lest you think the few are totally crazy, the leading critics of this theory are a couple of guys named Warren Buffett and Charlie Munger (Charlie is Warren's less well known partner at Berkshire Hathaway). Warren is considered by many to be the world's greatest investor. I think most successful investors have a problem with this theory. Being I make part of my living from trading, I don't agree with efficient market theory.

In my opinion, investing is a skill like any other. Some people are going to be better at it than others. If you are looking for the easy way to make outsize returns...I would say there isn't one. There are methods that don't take long once you thoroughly understand them, but there is a steep learning curve to get to that point, and it will take a lot of work. I think there are only a few people who can consistently beat the market. There have been studies done that show that even fairly long term successful records aren't necessarily predictive of future success. One study I remember reading said that only 16% of mutual funds that were in the top 10% for one ten year period would be there for the next decade (this study required that the funds be in existence for all of the next decade).

The people who are beating the market have put a lot of time and effort into understanding what is going on. However, I also think it is a lot easier for a small investor to beat the market than a large investor. The reason is that the more money you have to invest, the more you have to invest in any one position. Larger purchases and sales move the market more. If you are trying to invest billions of dollars, you have a lot fewer choices than someone trying to invest thousands of dollars. The companies that are too small for the institutions provide ample opportunity for those who are willing to get their hands dirty, and really understand what is going on. There are many studies out there that say most people who try trading on their own will fail, and as I said earlier, most individual investors greatly underestimate how much information and work it'll take to really understand what is going on. However, what most critics miss is that the studies say most, not all, of the people who try to be active investors will fail...so it is possible to succeed. What I think makes the difference between the winners and the losers is the winners enjoy the learning process, and enjoy getting in and doing the research. What I think investors have to decide is whether they are willing to put in the effort to succeed. For me, I always considered investing a hobby, and the money was always secondary. I enjoyed the aspect of playing the game. If you are this sort of person, and you want to go on your own, I'd say give it a shot. If you are just looking for an easy way of making more money, I'd say stick to standard investments...index funds and the like...you'll likely give up before you learn what you need to in order for you to have a chance. Of course, you can also piggyback on someone like Warren, who has a fantastic track record over several decades. To me, Berkshire Hathaway is the exception to the rule of long term track records not meaning a lot. They've done so well for so long...there has to be some extraordinary skill level there.

Answer 2

Yes , it is a true statement. The Securities Exchange Commission (SEC) requires High Risk Investors be accredited.
Smaller Investors usually work through Investment Brokers. who will generally pool investments into a group - then make a larger investment into the High Risk Project. Your % of return is somewhat higher but not quite as High as if you could invest as an individual , for clear reasons. I hope this helps

Answer 3

Actually, it is false. Investments are "risky" because the people who look at them think investing is risky. Investing is NOT risky. To not invest is the actual risky part. What the big investors do is to mitigate their risk according to the investment. People who are successful in investments look at every single aspect of the investment before jumping into it. They also have control over their money. This is the biggest problem with America today: people are too scared to invest (hence, lose control) because they think it's too risky. They, in turn, invest not to lose. This is the biggest difference between winners and losers. Winners invest to win.

I would suggest reading books on finances. The big thing to do though is to do some intrspet on your own life and see where you stand. This does not mean to see how much money you have or are making but how YOU view money. What you should first ask yourself is WHY do you want to invest and go from there? You should also start by learning what is an asset and a liability, what is money, and how do your emotions come into investing. BTW, if you are going to be an "average" investor then you will have "average" or small returns. Learn and grow. It all starts with you. Take care.

Caveat: If you really want to make it as an investor, DO NOT diversify. This term is used for those who are afraid and do not want to lose. A winner knows that to win he might lose and he learns to control that. Focus on one area and go for it.

Answer 4

Well sort of. The higher the risk, the higher the return CAN be. When you invest in risky stock, there is good chance you will loose the money you invested. If the risky stock pays off, then the return would be higher than a safer stock. So be careful investing in risky stock.

Answer 5

Yes but with the higher risk there are negatives as well. Be sure and do your research before you jump in read blogs for the company on yahoo and investment sites sometimes you get good forth coming info. on issues not visible from the picture that the company paints, lots of faceless whistle blowers, but use there info. cautiously as well some have hidden agendas.

Answer 6

Generally yes.

Investors want to be rewarded for taking on risk. Otherwise they will pick another investment.

For a small investor, you will see that high growth mutual funds will have dramatic fluctations, but the upside swings are usually greater than the downside.

Answer 7

Yeah sure is, just like everything else in life, the bigger the risk the bigger the reward.

The trick in investment is to find a balance. Its called diversifying.

When investing mix high risk investments with low risk ones to offset any potential big losses.

Its as the saying goes don't put all your eggs in one basket.
Get an economics text to get more details. Check an one by the author Beardshaw. (don't remember his first name)

Answer 8

It is generally true, because often you run the risk of losing part or all of your initial investment in high risk vehicles. Soooothey will offer higher returns to try and offset the risk of losing your capital.

Answer 9

According to academics, yes. Moreove, if you invest without careful research, your investments likely would be in the high risk, no returns category.

I highly recommend "The little book that beats the market" by Joel Greenblatt.

Answer 10

I am an individual investor, and YES that is very true!