Investment Myth That More Risk = More Return

Some investment myths continue to persist no matter what the reality is and most investment myths are dangerous to your financial well being.

Here is an oldie but a goodie!

More risk = more return.  The notion that you need to take on more risk to get more risk just isn't true.  I know it sounds like it ought to be but it is not.  Over the last decade or so, bonds have outperformed stocks.  Obviously bonds have risk but certainly less than stocks yet they have outperformed.

Smaller cap stocks are always tauted as the answer to higher returns and indeed the data appears to bear that out however upon closer examination, you will see that only a handful of small cap stocks do extremely well and skew the averages.  The fact is that without buying companies like Google in the 90's, apple in the 80's and a few obscure biotech companies, the smaller caps have pretty much done as well as their larger cap counterparts. 

A little less than half of the returns that stocks provide investors are in the form of dividends again proving that you do not necessarily have to take on more risk to get good returns.

Bad Investments Cost More Than You Think

I had a client that put well over 100k into a chinchilla farm.  I had another client throw real money to buy Ostrich eggs and had a friend sink money into a 'B' movie and of course, I had many clients lose all their money buying into sure things on the pink sheets, OTC bulletin board, private placements and Canadian Venture Exchange.

The commonality is obviously stupidity but besides that, the real monitary cost is hard to measure.

Sure you can look at whatever your investment was and write it off versus gains in another year but its more than that, its what we call opportunity cost which is simply the next best alternative.

For example, say you sank $100,000 into one of the above investing disasters fifteen years ago.  You would have missed out on fifteen years of growth at 'X%'.  Assuming just a measily 2% would be $134,000 today.  At 10%, you'd be missing $417,000 today, not just your original 100k.

So when looking at investments, keep the lost opportunity cost in mind.

Remember that successful investing has as much to do with not losing money as making money.