How can taking too little risk affect your investing experience?

• A. It ensures you will outperform the market.
• B. It may result in lower potential returns over time.
• C. It eliminates the need to diversify your portfolio.
• D. It guarantees protection against all losses.

Answer: (B)

Verified step by step guidance

1. Understand the relationship between risk and return in investing: generally, higher risk is associated with the potential for higher returns, while lower risk usually means lower potential returns.
2. Recognize that taking too little risk often means investing in very safe assets, such as government bonds or savings accounts, which tend to have lower returns compared to riskier assets like stocks.
3. Consider the concept of opportunity cost: by avoiding risk, you might miss out on higher returns that could have been earned by investing in assets with moderate or higher risk.
4. Acknowledge that while low-risk investments reduce the chance of losses, they do not guarantee protection against all losses, nor do they ensure outperforming the market.
5. Conclude that taking too little risk may result in lower potential returns over time, which can affect the growth of your investment portfolio and your ability to meet long-term financial goals.