The paradox of effort and risk: Why less is sometimes more

Already in childhood, most of us learn that effort is necessary to succeed. Whether it’s good school grades, a win in football games or losing weight – we invest work to achieve a goal. The well-known principle “no price without diligence” is usually considered a healthy leitmotif.

How much use really makes sense

But how much effort is really necessary? Many people believe that more effort automatically increases the chance of success. The more commitment, the more likely the result is, right? But is that really true?

The law of declining marginal yield

No, that’s not entirely true. There is a law known as the law of decreasing marginal yield. I would like to explain this with examples from the sport. If you want to play football professionally or run a marathon, you need to train. You should practice the ball regularly or lace up your running shoes to make your muscles stronger. But the first 100Hours of training bring significantly more progress than the next 100, and so on. You probably already know this effect, because it also explains why learning is often so much fun at the beginning: The learning curve initially runs steeply and then slowly flattens out. This is the practical example of the law of decreasing border yield.

If too much use is harmful

Furthermore, the following applies: Once you have already invested a certain effort, any extra effort can paradoxically do the opposite. Overtraining without breaks, for example, can be harmful. It could even lead to you not reaching your goal – such as running a marathon – at all because you’re hurting yourself. Too much of a good thing, even with good things, can have negative consequenceshave

Measure – the principle of the golden mean

The same applies to salt in the food: A little bit better, too much ruined it. Vitamins are healthy, but they harm in overdose. The following also applies to the partner search: It’s good to take the first step, but too much attention can be a deterrent. A diet that is too extreme can end up in anorexia. It is the same with learning before exams: excessive learning in theLast night often leads to exhaustion, while a good night’s sleep is much more helpful.Overall, the following applies: In life, it is important to find the right amount between too much and too little. To recognize this “golden center” you need experience. The Greek philosopher Aristotle wrote about the optimal balance between exaggeration and understatement. However, this center is not a fixed line, but depends on the circumstances. Confucius also taught themiddle way; In many cultures, from Buddhism to Judaism to Christianity and Islam, the idea of the Golden Center can be found.

The paradox: less risk – more yield?

Why is this balance so important? Why do I mention these old philosophers? It’s to familiarize you with a paradox. A paradox is a statement or concept that contradicts itself. You probably know the word from everyday life to express surprising or unexpected things. Paradoxes are also available in the financial world. One of the most famous isThe so-called risk-return paradox: Low-risk stocks often bring high returns, while risky investments yield low returns. That sounds contradictory, but it’s an amazing insight.

The common assumption in the financial world

The reason for this is a well-known investor rule: More risk leads to higher returns. Many investors, whether professional fund managers or private investors, believe in it. You are looking for the hottest stocks, the next big star like Apple, Google or Tesla. But that is exactly risky, because such stocks can often fluctuate or even go bankrupt.What happens if someone actually discovers the next Google or Tesla in time and the course quadrupled? Then that’s a reason to celebrate – the jackpot is cracked. But what about the boring, low-risk stocks? Many think they bring little profit because they involve less risk. The common assumption is: Lower risk also means lower returns.

Personal experience: From doubt to conviction

If I tell you now that risky stocks You can make poor while safe stocks make you rich, your first reaction will probably be: “What did he smoke?” That sounds contraintuitive, especially if you know the principle of the well-known investment wisdom. It is understandable that you are skeptical when a book claims the opposite of this general rule.I too was confused at first when I found out about this paradox. During my studies, I came across a scientific study that described exactly this risk-return paradox. Later, during my doctorate, I read the study again and took a closer look at the data. I found more and more evidence that low-risk systems sometimes deliver better resultscan as risky.

From theory to practice: Success with low-risk strategies

After my doctorate, I decided to test this theory in practice. Would an investment strategy based on this paradox also work in reality? And yes, she did! After a few years at the university, I started with an international investment company that manages assets for institutions and private individuals. This company, Robeco, is known for itsQuiet and smart approach, with roots dating back to the 1920s.Originally, I didn’t want to launch a new fund there, but after two years we founded a low-risk equity fund. What struck me was that the risk in the financial sector is understood differently than at the university. Here, risk often means poorer performance compared to an index, not the direct loss of money. I started to realize that thisunderstanding is wrong and that it could explain the investment paradox.We decided to draw our customers’ attention to this knowledge. With success: The small fund became a strategy with more than $15 billion of assets managed.

Share knowledge and allow skepticism

Why am I telling you all this? Very simple: I would also like to share this knowledge with laypeople. I am writing this one because I want to make the fascinating scientific findings understandable to most people who are not financial experts. I also enjoy explaining complex connections and using modern investments to understand the old wisdom.connect. My goal is to show that you can invest successfully in the long term by buying low-risk stocks – without any risky speculation.I assume you don’t fully believe me so far. This is understandable, because the idea that safe stocks bring high returns seems contradictory. Skepticism is even helpful to really deal with the topic. The philosopher Bertrand Russell once said that the biggest problem is that fools and fanatics convince of themselvesare, while clever people are full of doubts.