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Why you can’t get a 7% return for no risk

by Andy Millard

Andy Can Help

 

 

I confess that when I first got into the investment business, I really had no clue what I was doing.

A good example of that ignorance occurred in the first few months of my career. This was in the days when the financial world was dominated by commission salesmen, of which I was one. Not a very good one, as it happened.

I was talking with a prospective client, trying to come up with a financial product that he would buy. He said, “I’m pretty easy to please. I just want something that will earn me, say, 7% per year, guaranteed, without any risk.”

I replied, “Sure, let me see what I can find. I’ll work on it and get back to you.”

Needless to say, I worked on it, talked to the people who knew, and read everything I could find. Eventually I was forced to admit to the gentleman that what he was asking for did not exist.

There’s no such thing as a good-returning investment that has no risk. That’s just a cold, hard fact of life. Of course, as I learned what I was doing over the years, it became clear that this is a self-evident rule.

One might say that it’s one of the immutable rules of the universe: There is balance in all things. No matter what you get, you pay for it in some form or other. If you want a high return, you must take a high risk—a risk that corresponds to the reward you seek. If you’re willing to take only a small amount of risk, you can’t expect a large return.

That’s the way it works in every part of our lives. Different cultures express it differently, but the concept is universal. There’s no free lunch. You pay for everything you get, and you get what you pay for. The yin and yang in Eastern cultures is a simple way of expressing how every force is balanced by another.

Our mothers told us: you only get out of something what you put into it. Isn’t that the case with everything?

There’s no way to get around it: whatever amount of risk you’re willing to take, that’s how much reward you might get. I emphasize “might,” because risk is by its very nature, well…risky. There are ways to mitigate risk to some degree, but you can’t get around it.

The important questions are: How much risk should you take? How much reward do you need? And are you willing to take on the corresponding level of risk in exchange for the hope of that reward?

I never landed that particular client. Didn’t deserve him, to be honest. But I think he knew that he was teaching a young kid a vital, though obvious lesson, one for which I’ll always be grateful.

 

Andy Millard, CFP® is a retired financial planner and former principal of Millard & Company, an investment management firm. He does not offer financial planning services; this column is not intended as advice but rather education, commentary and opinion. If you have general questions about financial planning or investments, feel free to submit them to Andy at camillard@mac.com.