The Downside of High-Reward, High-Risk Investing

Over the past number of years, the best investments nearly all came out of the technology sector. We had terms like the FANNG stocks coined, we were told value-investing was dead, and year after year, the stable dividend-paying stocks just slowly trailed behind high-flying technology companies.

But, towards the end of November 2021, things began to change.

In November of 2021, the Nasdaq was up 130% on a five-year chart but is now up just 61%. The same chart shows the Dow was up 55% when the NASDAQ hit its peak but is now up just 37% over the last five years. On a year-to-date chart, the NASDAQ is down 31%, while the Dow is off just 11%.

If you look at individual technology stocks, it can get even worse. For example, Tesla is down 44% year-to-date, while Meta is off more than 70% since the start of the year.

But, something like boring old Coke-Cola, is flat on the year. And I should mention Coke is yielding a 2.96% dividend, which, if calculated into the year-to-date return, would put your investment ahead for 2022. Not very many big-name NASDAQ technology stocks can say that.

Every investor wants a big return. Seeing a stock climb 10, 20, 30 percent, or more in a single year. And it certainly beats seeing a stock climb a measly 4 to 6 percent.

However, the more important thing investors need to remember is that when stocks rise by double digits or more, they probably carry a lot more risk than a stock that hardly looks alive.

The Dow Jones Industrial average is full of stocks that creep along. They don't seem like suitable investments if you look at them on one-year charts. But, over decades, these stocks have been outstanding performers, especially if you add dividends, when considering their total returns.

Furthermore, the slow growth comes with low, or at the very least, much lower risk than the higher return stocks. That low risk could be what keeps you from making a rash decision with your portfolio.

When a holding in your account is down 40 or 50 percent in a year, it is easy to simply say you are cutting your losses and selling the stock.

However, history has proven the best method of investing is a long-term buy and hold. And that means holding stocks when they are down or lost massive amounts of value.

If you want to take your investing one step further, you can add to your positions when they are down. But, it is much easier to talk yourself into buying more of a stock when it's down 10% compared to one that is down 50%.

Most investors, especially ones that may not have experienced a significant market correction like what we are seeing today, don't know how it feels emotionally or even physically when your account takes a massive nose dive.

Thus, until you have an understanding of how you are going to react to a decline in a significant amount of value, you really should stick to more conservative investments.

As dull as it sounds, buying Exchange Traded Funds that track the Dow, like the SPDR Dow Jones Industrial Average ETF (DIA), is a safe, long-term bet. DIA is down 9.21% over the last year or 11% year-to-date. But it is up 7.8% annualized over the last three years and 11.72% annualized over the previous ten years.

In one year, owning DIA will not make you rich. Or even make you life-changing money. However, it is likely to do both over a few decades or more.

Other options are the Invesco Dow Jones Industrial Average Dividend ETF (DJD) or, my personal favorite, the Proshares S&P 500 Dividend Aristocrats ETF (NOBL).

DJD invests in just Dow components and weights them by dividend yield. DJD is 3.5% over the last year and 7% year-to-date while paying a 3.3% dividend yield.

NOBL is a little broader, pulling stocks from the S&P 500, but only those that have been paying and increasing their dividends for at least the last 25 consecutive years. NOBL is down a little more than DJD, at 11.23% year to date and 6.23% over the previous year, but it has 65 holdings compared to just 28 with DJD. So that gives you a little more diversity.

Investing in any form is all about the risk versus the reward. The higher the risk, the better the reward. But most people forget that investing is not just about the reward.

The balancing act we must conduct and find a happy medium with how much risk we are willing to take to gain a particular reward is very important.

I know people who take oversized risks regularly and are perfectly fine with their exposure. I also know people who have avoided the stock market their entire lives because even the most ultra-conservative investments meant they could still potentially lose money, and they were not OK with that.

Each person has to find what is right for them.

I will leave you with this last thought. There is nothing wrong with playing it conservatively, and it is probably the right way for most investors to invest, especially when the market is ripping higher.

If you don't think that is the case, ask a friend who invested heavily in high-risk, high-reward technology stocks over the last few years how they feel today.

Matt Thalman Contributor
Follow me on Twitter @mthalman5513

Disclosure: This contributor did not hold a position in any investment mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from for their opinion.