Is Your View of Risk Hurting Your Investment Returns?

RICHTWERT Investor Day in the Alps 2025

Risk in investing is often misunderstood—too many see it simply as the chance of losing money. But that’s only part of the story. This narrow view leads to flawed decisions and missed opportunities. In reality, risk is about uncertainty—the range of possible outcomes and how well you understand them. A more intelligent, thoughtful understanding of risk empowers investors to make better choices and achieve stronger financial outcomes. Here’s where investors stumble—and why mastering risk is critical to long-term investment success.

The Pitfalls of Misunderstanding Risk

Risk can be defined too loosely – and underestimated

Riskier investments need to offer higher expected returns to justify the added risk. However, especially in strong markets, it's easy for investors to forget that "expected" does not mean guaranteed. Assuming higher risk always leads to higher returns creates a false sense of security—and ultimately results in underestimated risks and potential losses.

Risk can be defined too narrowly – and overestimated

Most people think of investment risk simply as the chance of losing money. But in reality, there are many different types of risks that can impact your financial goals. For example, you might follow a strategy that fails to achieve your growth goals, invest too conservatively and fall behind inflation, tie up money you may need sooner, or work with managers who earn fees even if your portfolio doesn’t perform well. When we only look at risk through one lens, we can miss important parts of the bigger picture.

Risk is subjective – but often managed for the masses

What seems risky to one investor may not be to another. Risk tolerance is shaped by individual factors—goals, time, knowledge, and experience. For some, broader diversification may be the more prudent choice, helping to manage risk when time or expertise is limited. For others, concentrated positions can be appropriate if they have the conviction, expertise, and capacity to deeply understand what they own.

Risk is hard to measure –  and oversimplified – leading to wrong decisions 

Risk isn’t easily measured, so the temptation is often to oversimplify it. However, reducing it to a single number or formula – such as equating volatility with risk – distorts reality due to wrong assumptions. Volatility is an inherent advantage for investors with knowledge, yet most turn it into a disadvantage by treating it as risk.

How We Think About Risk - And What We Do With It

At RICHTWERT, we believe risk is not something to be avoided at all costs—but something to be understood, appreciated, and managed intelligently for profit. We approach risk in three integrated ways:

1. Correct Risk Understanding

   We treat volatility as an opportunity, not a risk. The market often misprices assets. It is there to serve us, not instruct us. Just because riskier investments must offer the prospect of higher returns to attract capital doesn’t mean there are no situations where we can earn higher returns without taking higher risk. In fact, finding the rare situations where volatility creates the possibility of high returns without taking on commensurate risk is what we strive for.

   
   

2. Comprehensive Risk Awareness

   Risk isn’t just the possibility of losing money—it also includes missing opportunities, failing to meet goals, loss of purchasing power, illiquidity, and the risk of being forced to sell at the wrong time just to name a few. We work hard at uncovering the range, the probability and the magnitude of risks that are present to make informed decisions. 

   
   

3. Intelligent Risk Management  

   We’re not in the business of avoiding all risk—we’re in the business of bearing risk intelligently for profit. That means taking only risks 

   1. we understand

   2. we minimize by narrowing the businesses we invest in down to the few

      1. that we believe we understand well and better than others

      2. that have durable competitive advantages protecting them from competition and in tough times

      3. that are run by capable and motivated managers with integrity

      4. that we can invest in with a margin of safety (an attractive price) to protect us from the risks we are aware of as well as the risks we are unaware of

   3. we are well paid to bear because the odds are in our favor.

      
      

In short: We don’t speculate. We invest—by managing risk with discipline, clarity, and care.

Bahram Assadollahzadeh, CFA

June 28th, 2025