Money MythBuster: High risk equals high returns

With high risk, you could ALSO have higher potential losses. Before taking more risk, build an efficient portfolio, invest across asset classes and diversify!

Ruth Saldanha 16 July, 2019 | 2:07AM
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Mr. Morningstar Money Man: You know how to make the highest returns? Take the most risk, because the most risk equals the highest return, right? Wrong. Back in 2012, these guys published a paper. It was called "low risk stocks outperform within…" Riveting. But wait, they studied the returns from 33 different stock markets from 1990 to 2011. That's 21 years. You know what they found? That low risk stocks consistently provide higher returns than high risk stocks. I know what you're thinking. Didn't this guy win the Nobel Prize for saying more risk equals more returns? Wrong again.

Markowitz was talking about highly diversified portfolios called efficient portfolios. They have the highest level of expected return possible given their risk. Now, if you already hold an efficient portfolio, the only way to increase your return is to increase your risk, but only that. And we're not saying you will have higher returns, just that you will have higher potential returns. You could also have higher potential losses. Before taking more risk, build an efficient portfolio. Invest across asset classes and diversify within each class. Count it down for me. Busted.

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About Author

Ruth Saldanha

Ruth Saldanha  is Senior Editor at Morningstar.ca. Follow her on Twitter @KarishmaRuth.

 
 
 

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