I’ve spent years helping people build wealth, and there’s one myth I need to debunk right now: the idea that you need to risk big to win big. This dangerous belief keeps many people broke while the truly wealthy follow a completely different approach.
As a former financial advisor, I used to teach this high-risk philosophy. But after leaving that world and entering alternative investments, I discovered something shocking – wealthy investors don’t gamble with their money. They systematically reduce risk while maintaining solid returns.
Think about it logically. The definition of risk is “chance of loss.” If you have a 90% chance of losing, you only have a 10% chance of winning. The math doesn’t lie. How could increasing your chance of loss somehow magically increase your chance of success?
The Financial Industry’s Dirty Secret
Where did this “high risk equals high returns” myth come from? Follow the money. Financial companies teach this philosophy while doing the exact opposite themselves.
Remember the global financial crisis? AIG, Fannie Mae, Freddie Mac, and the big five banks had to be bailed out because they took excessive risks. But here’s what’s interesting – most banks don’t actually take huge risks with their own money.
Financial institutions make their money from guaranteed fees they charge you. They’re not risking their own capital in the market – they’re risking yours! They make money regardless of whether you win or lose.
As Robert Kiyosaki brilliantly puts it, diversification as taught by financial advisors is like “buying five used cars in case one of them’s a lemon.” That’s not smart investing – it’s spreading risk without actually reducing it.
How Real Wealth Is Built
If high risk truly created high returns, shouldn’t we apply this principle to everything? Should we take high risks in our marriages or with our health? Of course not! We know that would lead to disaster.
Here’s how I approach investing to minimize risk while maximizing returns:
- I question my own motives first. Beyond the rate of return, why am I considering this investment?
- I thoroughly vet the people involved. What’s their experience level? How have they handled problems in the past?
- I look for character. I once saw a friend pay $2 million of his own money to bail out a deal just because he had friends invested in it.
- I ensure proper equity cushions. When lending on real estate, I want at least 30-35% equity in the property.
- I verify everything through proper due diligence – appraisals, inspections, and financial statements.
Banks understand this approach perfectly. They check your credit, verify your income, and require down payments. They want skin in the game and sufficient equity to protect themselves if things go wrong.
With rental properties, I focus on quality property management and proper tenant screening. I verify appraisals and conduct thorough inspections. For business investments, I examine leadership, financial statements, and contingency plans.
Taking Control of Your Investments
The best investments are those where you can control the risks. Sometimes this means contributing more than just money. Warren Buffett doesn’t just throw cash at companies – he brings in his team to ensure things run smoothly.
I’ve seen investors take active roles in their investments when they spot potential problems. One investor I know appointed himself CEO of a small oil operation when he noticed communication issues between partners. He protected his investment by addressing the weakness directly.
As business owners, we understand this intuitively. We don’t gamble with our businesses – we make calculated decisions to ensure success. Yet many business owners will gamble in the stock market with companies they have zero control over rather than reinvesting in their own operations.
Wealthy people don’t gamble – they invest. They focus on controlling risk while ensuring steady growth that compounds over time. This approach builds generational wealth that lasts far beyond a single lucky break.
I challenge you to forget the “high risk creates high returns” nonsense. That’s what financial companies want you to believe so you’ll take all the risks while they take none. You deserve better. Start focusing on minimizing risk to get better returns, especially by looking beyond Wall Street to Main Street investments where you have more control.
Real investors ensure they not only get a return on their money but also a return of their money. That’s the true path to wealth.
Frequently Asked Questions
Q: If high-risk investments don’t create higher returns, why do so many financial advisors recommend them?
Financial advisors recommend high-risk investments because they make money from fees regardless of how your investments perform. They’re not risking their own capital – they’re risking yours. The financial industry perpetuates this myth because it allows them to charge higher fees while transferring all the risk to their clients.
Q: What are some examples of low-risk investments that can still provide good returns?
Some lower-risk investments that can provide solid returns include properly structured real estate deals with good equity positions, private lending with appropriate loan-to-value ratios, turnkey rental properties with professional management, and business investments where you have some control or oversight. The key is finding investments where you can verify value, control variables, and have multiple exit strategies.
Q: How do I know if I’m gambling or investing?
You’re gambling if you’re primarily motivated by the potential high return without understanding how to control the risks involved. You’re investing when you thoroughly research opportunities, understand the underlying asset, verify the people involved, and have mechanisms in place to protect your capital. Investors ask “how can I minimize my chance of loss?” while gamblers focus only on “how much could I make?”
Q: What questions should I ask before making an investment to reduce my risk?
Before investing, ask: 1) Beyond the return, why am I considering this investment? 2) Who are the people involved and what is their track record? 3) What’s the worst-case scenario and how is my capital protected? 4) What verification has been done on the asset’s value? 5) What control or recourse do I have if things go wrong? These questions help ensure you’re making calculated investment decisions rather than gambling.
