This blog post discusses strategies for maximizing returns by accurately understanding and managing risk.

Accurately Assess Risk – Understand the True Meaning of Returns

Many people say, “High returns come from high risk.” This is true. However, relying solely on this statement and investing without facing or ignoring risk is extremely dangerous. Properly recognizing and managing risk is paramount in investing. In this article, we explore this topic through insights from David F. Swensen, former Chief Investment Officer of the Yale Endowment Fund.

“Manage risk well, and returns will follow.”

This is not mere advice. It is a proposition that pierces to the core of investment philosophy.

Risk is not the enemy – understand the nature of risk

Managing risk well does not mean eliminating or fearing risk. Quite the opposite. Returns always stem from risk, and without taking risk, you can never expect significant returns. But there’s a crucial premise here: it must be ‘acceptable risk,’ and you must ‘accurately know the level of risk you can handle.’
The problem is that many people think like this:

“I’m an adventurous person, so I’m fine!”

But having an attitude that isn’t afraid of risk and having the ability to handle risk are completely different matters. If you don’t have the liquidity of assets or the financial solidity to cover your losses, courage alone won’t let you handle risk.

Why the wealthy are better equipped to handle risk

People often say, “The rich make money more easily.” The reason isn’t simply the size of their capital. Wealthy individuals possess a greater capacity to absorb losses when they occur. In other words, they often have the financial cushion to endure losses and maintain liquidity that prevents their lifestyle from being impacted while investment funds are tied up.
Simply put, their ‘resilience’ in high-risk situations is fundamentally different. This difference ultimately translates into varying risk-bearing capacities. Therefore, the first step in investing is to accurately assess your own risk tolerance.

How much risk can you handle?

When opening an investment account at a bank or securities firm, they evaluate your investment preferences and risk profile. This is to match you with appropriate financial products based on your risk tolerance. Just like this, in investing, ‘knowing yourself’ is the starting point.
How can you calculate your risk tolerance? First, you must thoroughly understand your asset situation. Generally, individuals meeting the following conditions are assessed as having a high risk tolerance:

Own debt-free fixed assets (e.g., real estate)
Have stable and consistent fixed income
Possess surplus funds not immediately needed
Have no major future expenditure plans

Let’s consider an example.
Suppose someone owns two properties. They have no mortgages and no immediate plans to sell. They hold 200 million won in cash assets and receive a fixed monthly income of 10 million won. In this case, even if they invested the entire 200 million won and lost it all, their standard of living would remain largely unchanged. Therefore, this person can tolerate a certain degree of high-risk investment.
Conversely, what about the typical salaried worker who must repay loans?
Even if their income is decent, if they have many fixed expenses like mortgage payments and children’s education costs, their capacity to take on risk is low. If they invest in high-risk assets and incur losses, the repercussions could lead to a decline in quality of life or even an economic crisis for their family.
As such, risk tolerance varies greatly depending on each individual’s financial situation, and therefore, their portfolio must be adjusted accordingly.

Don’t easily believe ‘high-return’ investments

Phrases like “high-return investment opportunities” are commonplace in the countless SNS ads, YouTube content, and blog posts flooding our feeds daily. Among them, you’ll find exaggerated claims like these:

“Monthly salary 1 million won, investment profit 10 million won!”
“Just invest 5 minutes a day and you too can become rich!”

These statements deliberately distort facts and expectations to lure investors. They often exploit human instinctive fears, like the cycle of life and death, using anxiety as a marketing tool.
But there’s one crucial fact to remember.
There is no such thing as high returns without risk, and there never can be.
Any product guaranteeing over 5% returns with no principal loss is illegal under financial law.
High-yield structured products, so-called ‘high-return products,’ are designed with extremely complex structures, and risk factors are cleverly hidden throughout the prospectus.
The ‘expected return rate’ mentioned in advertising copy is merely an expectation and will inevitably differ from the actual return rate. Therefore, before investing, you must read the prospectus coldly and rationally, and consider even the worst-case scenario.

Asset management is a game of ‘money making money’ – diversification is key

Managing assets is fundamentally a game of how to control risk. We’ve often heard the saying, “Don’t put all your eggs in one basket.” This expression emphasizes the importance of risk diversification.
Risk is an objectively existing variable in reality. However, it is possible to reduce, diversify, and control that risk. Because risk is a probabilistic concept, diversifying investments across various assets minimizes the impact of losses in any single asset on overall returns.
This is where the concept of a ‘portfolio’ comes into play.
Unlike simple diversification, a portfolio strategically combines assets with different risk ratings to maximize returns while minimizing risk.
This concept was first introduced in 1952 by American economist Harry M. Markowitz as ‘portfolio theory,’ for which he was awarded the Nobel Prize in Economics.
According to his theory, combining assets with low correlation can reduce the risk of each asset below the simple average. In other words, it means you can maintain or increase returns while reducing risk.
Furthermore, combining risky assets and risk-free assets at an optimal ratio maximizes expected returns while keeping risk levels within tolerable bounds. However, this ratio may vary depending on individual preferences, financial status, and market conditions. Ultimately, the key is strategically allocating assets and flexibly adjusting them in response to changes.

Success also carries risk – Life as an Investment

While we’ve focused on investment risk thus far, this principle equally applies to our lives.
The ‘high risk, high return’ rule exists within our lives too. There is no such thing as easy success. What may appear glamorous and effortlessly attained on the surface is built upon layers of risk, patience, and the experience of failure.
Every success comes with a price. If something is gained without effort, it is not success but mere ‘luck,’ and such luck is bound to be reversed eventually.

“No costs or sacrifices are needed. You don’t have to work hard. Just sit still and move your fingers, and money will pour in like a waterfall!”

Do you still believe such claims?
A person’s abilities are also an investment asset.
And the process of diversifying and refining that ability—this is the portfolio of life.
Thirty years ago, the most crucial skill for accounting majors was ‘mental arithmetic’. But today, it’s difficult to live a lifetime relying on just one skill.
Nowadays, many are ‘multi-jobbers’, securing diverse income streams through ‘side gigs’ or ‘third jobs’. This is the portfolio diversification of abilities.
By utilizing your various talents and skills in diverse ways, you can reduce life’s risks while diversifying your returns.

In closing – Risk is not fear, but opportunity

Whether in investing or life, the crucial question remains this:

“How can I maximize returns while taking on risk?”

This question offers insights applicable beyond finance, to life itself.
Risk is not something to avoid. When properly recognized and managed, risk becomes the very foundation of success.
And the greatest risks are ignorance, refusing to face reality, or overconfidence.
Don’t fear risk. Analyze coldly whether you can handle it, and strategically build your own portfolio within that framework.
That is the most realistic and powerful way to achieve truly meaningful success.

Summary

Risk is the source of returns. However, you must be able to bear it.
Assess your risk tolerance based on your current asset situation.
Don’t be swayed by advertising slogans; carefully review the investment prospectus.
Risk can be diversified, and portfolio strategy is key.
Life itself is ultimately an investment. Diversify your capabilities and spread your risks.

I hope this blog post serves as a tool for insight, encouraging you to view your life strategically, beyond just offering investment advice.
Success is a castle built upon risk. Understand it properly, bear it wisely, and utilize it strategically.
Your choices today open the possibilities of tomorrow.