This 1 Simple Strategy Can Help You Grow Wealth, Without The Risk

This article was originally written for & published on Forbes

There is no opportunity for a big return without taking a big risk. And, you don't have to take on huge risks to increase your net worth.

Both statements are true.

Sometimes, you're in a position where you need to take on a lot of risk to achieve your goals... but when it comes to building wealth, those situations are actually quite rare.

In fact, it can be counterproductive to your wealth-building goals.

Taking unnecessary risk is what can tank your investment portfolio; taking on the appropriate amount of risk is how you increase the size of your balance sheet over time.

What "Unnecessary" Investment Risk Looks Like—And The Real Reason It’s Problematic

Outsized risks occur when you make a speculative bet in the market, or when you hold concentrated stock positions in hopes that this one investment will be the thing that makes you.

There are other forms of high-risk investments, but these are the two most common ones I see as a financial advisor working with my wealth management clients.

It’s not that taking the big risk never works out or are always foolish to take on. We all have that anecdotal story of a relative or friend-of-a-friend who truly did strike it rich off one lucky investment.

That’s the real issue with high-risk investing: the higher the risk, the more you are likely relying on luck that things work out in your favor.

The probability of success drops. Your reduce your odds of actually accomplishing your goals because the likelihood of hitting it big becomes smaller the more risk you take.

As Morgan Housel writes in my all-time favorite personal finance book, “Many bets fail not because they were wrong, but because they were mostly right in a situation that required things to be exactly right.”

When you take on too much risk, you could literally be unable to afford the big loss might show up instead of the reward you hoped for.

Your Limit Isn’t Your Tolerance, It’s Your Capacity For Risk

Standard education around investment management includes (lots of) discussion around risk tolerance. Risk tolerance is what every financial advisor says they help you assess as part of what they do for you.

Which is basically worthless if you don’t also talk about risk capacity.

You probably don’t need a professional to tell you your comfort level with taking risk; most people have an innate understanding of whether they are risk-averse or risk-seeking.

I don’t mean to suggest it’s unimportant to know where you fall on that spectrum; it certainly does inform how you should allocate your investment portfolio.

But a far more critical factor in making sure you’re investing appropriately is your risk capacity.

Your risk capacity is your actual ability to absorb a negative outcome or a downside if and when it shows up. The more financially stable you are, the more liquidity you have, the fewer your needs or obligations, the more capacity you (likely) have to handle more risk.

Most people do not have a very high risk capacity, especially if they’re self-made and creating their wealth from scratch. That isn’t a bad thing, but it is a factor to be aware of.

You’re probably not in a position to take on massive risks because you simply do not have the time or means it would take to recover from getting smacked with a big loss when you’re trying so hard to build up your net worth.

The most important thing you can do is simply stay in the game: stay invested, don’t take on losses through unforced errors, and give yourself the time that is required to see the real results from compounding returns.

You are likely to get a better return at the end of the day by following a lower-risk strategy simply because taking less risk will probably let you keep more money in the market for longer.

It doesn’t matter if your risk tolerance is sky-high if you don’t have a financial foundation that can allow you to lose real money and stay on track to achieve your long-term goals while enjoying the life you want in the present moment.

The Best Strategy To Improve Your Odds Of Success When Growing Wealth

Again, taking on a lot of risk isn't even something you have to do to build wealth! Doing so is an unforced error and a very easily-avoidable mistake.

What should you do instead?

Focus on contributing a strong percentage of your income to long-term investments within a globally diversified portfolio made of low-cost mutual funds and exchange-traded funds (ETFs).

Notice this is a two-part task, and the first step is simply saving.

The best strategy to improve your odds of financial success is probably also the most boring, the one that’s staring you straight in the face: You just need to focus on saving (more) money.

The Unmatched Power Of A High Savings Rate

You don't need a fancy strategy; you don't need to get involved in highly complicated investments that you didn't understand or fully vet.

The best way to grow wealth for most people is to save money—and, realistically, a lot of it.

At my firm, we recommend clients save a minimum of 25 percent of their income, but as a financial advisor, there's a reason that I personally save 30 to 40 percent of my household income each year:

Because it is what we consistently see as the single most powerful thing that is within your control to do that will dramatically increase your wealth over time.

(It’s also important to note that “saving money” is the first of a two-part action you need to take. Once you save the money, you need to make sure you contribute it to an investment vehicle designed for long-term growth like a qualified retirement account or taxable investment account where it stays invested.)

This “strategy” might be the simplest and most straightforward way to grow wealth, but don't let the lack of complexity behind this cornerstone piece of advice fool you. "Just save money" is wicked hard to do.

And “just save money" for 5, 10, 15, 20 years and beyond is so difficult very few people achieve it, because of the dedication, commitment, focus, and consistency that it takes to accomplish.

Simple does not mean easy. It's another reason why a lot of people would rather distract themselves with the next shiny object in the investment world that they hope will be their lucky ticket to faster, easier wealth.

But the real world does not work that way. (If it did, wouldn't everyone be taking advantage of the free lunch and getting rich quick?)

If you find yourself thinking “how can I earn a better return,” stop and realize you have a better question to consider. It's this one: "How can I increase my savings rate?"

Focus on answering that, and you move the locus of control from an external force ("the market") to an internal one - you, and your choice to increase your net worth by devoting more of your income to growing your assets.

The higher your savings rate, the less you need to take on any kind of outsized investment risk. Your savings provides the power your investment porfolio needs to compound over time.

And that is the real secret to building wealth.

It's not fancy, sexy, exciting—or, if I'm being brutually honest, particularly fun most of the time. Saving more money usually means spending less, and saying "no" to things you'd geneuinely enjoy in the present.

But if you fail to save, you will have to rely more on rolling the dice with high-risk bets that come with downsides you may not be able to recover from.

By creating and sustaining a strong savings habit, regularly contributing cash to your portfolio through a system like dollar-cost averaging, you lessen the impact of volatility and market fluctuations on your long-term results.

Your primary goal should always be to grow your wealth steadily and securely, without taking on unnecessary risk.

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