Investment Blog

The Secret to Long-Term Investment Success: Focusing on Risk, Not Just Returns

When building an investment portfolio, many focus solely on maximizing returns. But here’s the truth: risk is more important than returns in achieving long-term success.

Why? Because risk is something you can control, while returns are unpredictable. Unfortunately, many investors tend to chase high returns in a bull market and panic about risk in a bear market. But seasoned investors, like Warren Buffett, take the opposite approach:

“Be fearful when others are greedy, and greedy when others are fearful.”

Let’s break it down:

Many get caught up in recent gains in a rising market and believe the good times will continue. This recency bias clouds judgment, making investors forget that rapid rises often lead to significant drops. Complacency sets in, and before you know it, the risk is ignored—resulting in disappointment when markets eventually correct.

On the other hand, a smart investor recognizes that a soaring market means higher downside risks. With rising prices, the potential for future losses increases, and the risk of a trigger (an unexpected news event or economic shift) becomes more real. Instead of chasing returns, savvy investors focus on controlling potential losses.

When the market falls, smart money steps in. Knowing the downside risk is reduced, seasoned investors increase their exposure to equities, while the average investor, gripped by fear and influenced by past losses, exits the market—again driven by recency bias.

So, what’s the key to successful investing?

1.      Don’t chase returns.
2.      Stay focused on managing your risk.
3.      Be patient and brave enough to go against the crowd.

Start reducing your equity exposure as markets get more expensive, and do the opposite when they fall. It takes courage to follow this strategy, but the rewards in the long term are worth it.

Originally posted on LinkedIn: www.linkedin.com/sumitduseja