No Risk, No Reward

 

I love the saying no risk, no reward. It’s equally true for investing and for a life well lived. If you’re not in the game, you can’t win anything, and taking too little risk is like sitting on the sidelines and watching others take all the glory.

Getting in the game is different from playing to win. Most people are naturally risk averse and way too cautious. Whether it’s investing, picking a career path, or choosing a life partner, too much of the world tells us to “play it safe.” Playing it safe is like playing with one arm tied behind your back. Have you ever watched a sports event where one team tries to defend a narrow lead by taking a “safe” approach? They always seem to blow it with their caution.

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Investing returns are essentially payment for accepting risk, so getting higher returns pretty much demands more risk. In investing, a “safe” portfolio full of guaranteed cash flow (like bonds) means predictable but low returns. Only investors who need predictability should build a “safe” portfolio. Paradoxically, I also see many people assuming too much risk for their given returns. Wise investing is about getting well paid for the amount of risk that we’re willing to assume aka, maximizing our risk-adjusted returns.

The best way to get great risk-adjusted returns is by investing in a diversified portfolio. New investments aren’t isolated — they’re there to improve the risk-adjusted returns of a whole portfolio. Adding a blue chip stock might do nothing to help if that stock is going to move in tandem with the rest of the portfolio. But, adding a new type of asset that is uncorrelated with the rest of a portfolio will help reduce risk and increase risk-adjusted returns.

Unfortunately, the most accessible opportunities (public equities) are subject to the same economic ups and downs. Worse, most people buy familiar assets — stocks in certain sectors or geographies, etc. It’s great to use personal experience to pick investments, but we also need to be careful to really diversify. First and foremost that means owning different asset classes. If your nest egg is all in the stock market, adding real estate is a fantastic way to reduce portfolio risk and improve risk-adjusted returns.

Most Americans have their investment risk concentrated in the stock market. Meanwhile, real estate offers amazing opportunities for diversifying across different types of properties, industries and geographies that will specifically complement what you already own. Adding real estate to an investment portfolio looks like a no-brainer.

To me, taking on risk is like playing hard and finding great risk-adjusted returns is like playing smart. Everybody wants to play smart, and, depending on where in life you are (age, health, family, etc), everybody has their own specific capacity to play hard. Push yourself too hard and you can get badly hurt. But get the balance just right, and you’ll do well. That’s why I encourage everybody to take on as much risk as they can tolerate, but no more.

Call me at 847-317-0077, email me at [email protected], or tweet me at @benreinberg or @alliancecgc if you can submit us a property to acquire and/or would like to invest with us. For further information on investing with Alliance, please click here.

My Best,

Ben

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