This blog post examines the principle of balancing returns and risk, exploring whether true low-risk, high-return investments are possible within market logic.

Why do lower risks yield lower returns?

You’ve likely heard the phrase ‘High Risk, High Return’ at least once. It means that holding financial assets with high investment risk allows you to expect correspondingly higher returns in the market. This isn’t just a simple saying; it’s also how the market actually operates. In other words, high returns are the reward given to those who take on high risk, and this principle stems from the structure and psychology of capital markets.
First, we must understand the fundamental market structure: the law of supply and demand. The price of a good or asset in the market is determined by the balance between supply and demand. If the supply of an asset is low but demand is high, the price rises. As prices rise, producers or suppliers anticipate greater profits, leading them to increase supply. This gradually restores the balance between supply and demand, and prices converge toward a more stable level.
Conversely, if supply becomes excessively abundant, prices fall. As prices decline, demand increases again, and the market repeats the process of finding equilibrium. This flow applies equally to asset markets.

What if there were a ‘Low Risk, High Return’ product?

Now, let’s make one assumption. Imagine a product called ‘Low Risk, High Return’ is launched in the market. For example, suppose there’s a product where investing 10,000 won guarantees a stable annual return of 5,000 won without any principal loss.
If such a product actually existed, how would investors react? Everyone would rush to buy it. With high returns and almost no risk, it would be an incredibly attractive investment.
As demand explodes, the product’s price would immediately start rising. The seller would think:

“Only 100 units available, but 10,000 people are rushing in? Then I should double the price.”

How would investors react then? If the product price rises from 10,000 won to 20,000 won, but it still yields 5,000 won annually, the return rate halves from 50% to 25%. Still, it’s a high return rate. Therefore, many people will still jump into investing.
The seller raises the price again. As this cycle repeats, investors eventually reach a point where they no longer perceive this product as ‘low risk, high return’. The price peaks, and demand naturally declines. The market rebalances, and the product’s return converges to a reasonable level.
Through this process, we can understand the relationship between return and risk.

Low-risk products inevitably see their returns decline over time due to market competition.

Does high risk necessarily guarantee high returns?

Now, let’s consider the opposite.
Does high risk always lead to high returns?
The answer is “no.”
High risk means ‘a greater possibility of loss,’ not ‘guaranteed returns.’ In fact, the opposite could be true. Taking on high risk means you might gain returns, but you also face the possibility of significant losses.
Someone might say something like this:

“I invested in high-risk stocks, but I’ve never suffered a loss yet. I’ve made a lot of money too.”

This is possible. Such cases do exist in the market. However, there is a crucial misunderstanding here.
The fact that risk hasn’t manifested yet is entirely different from the risk not existing at all.

Risk is the product of ‘probability’ and ‘impact’

In economics, the magnitude of risk is quantified by two factors.

1. Probability: The likelihood of the risk occurring
2. Impact: The size of the loss if the risk occurs

Multiplying these two values gives the absolute magnitude of the risk.
For example, let’s compare the following two situations.

Situation 1

Investment Amount: 10,000 won
Probability of Failure: 50%
Loss if Failed: 100 won
→ Risk Factor = 0.5 (Probability) × 0.01 (Impact) = 0.005

Scenario 2

Investment Amount: 10,000 won
Probability of Failure: 5%
Loss if Failed: 10,000 won (Total Loss)
→ Risk Factor = 0.05 × 1 = 0.05

Comparing these two cases, we see that the second scenario, with a lower probability of failure but a larger potential loss, carries significantly higher risk.
This concept can be well illustrated using investment examples in cryptocurrencies like Bitcoin.
Bitcoin offers high potential returns, but it also carries the substantial risk of its value potentially dropping to ‘0’. In reality, Bitcoin faces the risk of a complete collapse in value due to factors like the emergence of government-backed digital currencies or increased regulation.
Conversely, investing in the US dollar is a relatively stable choice. As a currency backed by the credit of the US government, the maximum risk is limited to potential losses from exchange rate fluctuations.
Thus, even a low-probability risk can become very significant if its impact is large. Conversely, a high-probability risk can be relatively minor if its impact is small. This is the core principle for assessing risk in investing.

Is it luck or skill?

If you’ve invested in ‘high-risk’ assets so far and achieved high returns while experiencing almost no losses, that’s something to celebrate. However, you shouldn’t mistake that outcome for being due to your own skill or insight. Moreover, dismissing it as ‘luck’ and feeling complacent is a dangerous attitude.
You are merely riding on a ship that hasn’t capsized yet. The risk exists, but it hasn’t hit you yet. If you fail to detect that risk and mistake it for skill, the day will inevitably come when the market reclaims that perceived skill.

In closing: A true ‘master’ does not fear risk, but neither does he ignore it

Investing is like navigating the sea. Sailing swiftly with favorable winds during calm weather does not prove a captain’s skill. True ability is revealed in predicting storms, preparing for them, and minimizing losses.
Risk is not something to be avoided, but an element to be accurately understood and managed.
If you are an investor, you must be as sensitive to risk as you are to returns. Before complaining about low-yield products, consider why they are stable.
And before being tempted by high-yield assets, always ask yourself: What is the cost of that return?