The One True Secret to Successful Investing

That is the nature of risky markets; if you time it just right, you can come out ahead, but getting the timing right is rare and even if you do it once, odds are you won’t be able to do it again. Many people who called the 2008 financial crisis have never repeated their success — or luck.

Now that we’ve established the simple risk/returns rule, it’s important to understand that there is nothing wrong with taking more risk. If you do, you will probably get a higher return over time.

Higher risk doesn’t mean big losses are inevitable. You just have less certainty. The problem, whether it’s the housing bubble, the FTX crypto exchange, hedge fund Long-Term Capital Management LP, or any other financial disaster, is when people take on lots of risk and present it as (or wrongly believe that it is) risk-free.

Big financial blowups happen when someone thinks they have a risk-free bet that will beat the market, and to make their return even bigger they take on extra leverage, borrowing to finance their “sure thing.”

Leverage makes everything bigger, returns and losses, so when the “sure thing” loses money it can be catastrophic. Even leverage is not inherently bad. The real problem is thinking something is risk-free that is in fact risky, and then doubling or tripling down (or more) on that bet without accounting for the potential downside.

The Right Perspective

Anyone who works in financial services should know better, and yet they so seldom do. Maybe that’s because it’s just too easy to believe you are smarter than the rest, and when the market is up and so is your portfolio, it can look that way.

But it’s not true. If you are beating the market, you are risking a bigger loss, and it will probably happen at the worst possible time.

If you can afford that loss and have the mettle to ride out down markets, then it can eventually be a worthwhile tradeoff. If you do pay for advice, it should be for risk management or retirement planning, not beating the market.

In 2023, if you want to do it yourself, then think about balance: Take on some risk, but not an excessive amount. For most of us, that might mean an index fund that invests in a lot of stocks and charges low fees.

Then you limit your exposure to only that market risk, which is spread across more companies. Even after 2022’s down market, the S&P 500 is higher than it was three years ago. The same isn’t true for lots of riskier investments.

Allison Schrager is a Bloomberg Opinion columnist covering economics. A senior fellow at the Manhattan Institute, she is author of “An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk.”

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