Low Returns Stoke Investor Appetite for Risk
Yes, the returns can be big, but the odds of underperforming also go up.
Bloomberg, November 12, 2019
“Investing,” as Dave Nadig of ETF.com likes to say, “is a problem that has been solved.” Keep it simple, watch your costs, be diversified, invest for the long run, let the magic of compounding work for you. For most portfolios, statistically speaking, it is a high probability solution.
Despite this, more and more people seem to be ignoring those investor-friendly probabilities. Instead, they have been embracing higher-risk strategies that hold out the theoretical possibility of higher returns. The approach includes using leverage, farmland and/or timber, hedge funds, options strategies, commodities, and venture capital. Perhaps the biggest beneficiary of the latest embrace of risk – at least as measured by capital flows – is private equity.
Why are investors choosing to “hit on 17” instead of putting the odds on their side? Beyond the usual cognitive #fails, I suspect many culprits are at work.
Let’s review five of them:
1. Lower expected returns
2. Misunderstanding risk
3. Chasing what worked
4. Lottery-ticket investing