Returns are the reward you receive for taking investment risk.

While most evident when markets are falling, threat is ever-present. However, it’s not something you want to avoid totally because without risk, you won’t be able to grow your wealth sufficiently over the long term to achieve your “financial goals”. And if returns are the reward you receive for taking investment risk, logic follows that the higher long-term returns usually come from investments with more risk (eg stocks).

http://nsestocktips.in/why-do-i-need-to-take-investment-risk/

Note: 

Over the long term, cash/term deposits are really risky.  The buying power of these decline due to inflation.

The dictum, you need to take higher risks to get higher returns is generally true.  However, the smarter investors also realise there are occasions when an investment is available at low risk with a potential of high return, especially when a good company is being sold at low prices not due to any fundamental reasons.

Buffett at University of Kansas (2005): You can still earn extraordinary returns on smaller amounts of capital.

University of Kansas : Warren Buffett Q&A
Notes by Professor Hirschey, University of Kansas ( May 6, 2005 )

Question: According to a business week report published in 1999, you were quoted as saying “it's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.” First, would you say the same thing today? Second, since that statement infers that you would invest in smaller companies, other than investing in small-caps, what else would you do differently?

Yes, I would still say the same thing today. In fact, we are still earning those types of returns on some of our smaller investments. The best decade was the 1950s; I was earning 50% plus returns with small amounts of capital. I could do the same thing today with smaller amounts. It would perhaps even be easier to make that much money in today's environment because information is easier to access.

You have to turn over a lot of rocks to find those little anomalies. You have to find the companies that are off the map - way off the map. You may find local companies that have nothing wrong with them at all. 

A company that I found, Western Insurance Securities, was trading for $3/share when it was earning $20/share!! I tried to buy up as much of it as possible. No one will tell you about these businesses. You have to find them.

Other examples: Genesee Valley Gas, public utility trading at a P/E of 2, GEICO, Union Street Railway of New Bedford selling at $30 when $100/share is sitting in cash, high yield position in 2002. No one will tell you about these ideas, you have to find them.

The answer is still yes today that you can still earn extraordinary returns on smaller amounts of capital. For example, I wouldn't have had to buy issue after issue of different high yield bonds. Having a lot of money to invest forced Berkshire to buy those that were less attractive. With less capital, I could have put all my money into the most attractive issues and really creamed it.

I know more about business and investing today, but my returns have continued to decline since the 50's. Money gets to be an anchor on performance. At Berkshire's size, there would be no more than 200 common stocks in the world that we could invest in if we were running a mutual fund or some other kind of investment business.


http://www.valueplays.net/wp-content/uploads/vinvesting-com.pdf

Was the potential reward worth the risk?

An investor may be tempted to chase that little bit of extra return on his investment. Perhaps, he may put his life savings into saving schemes that pay slightly more than ordinary bank deposits. However these types of deposits are a little bit more risky. Every now and then they can blow up. It's always sad when these, usually, small investors have lost their savings that way.

Is the higher return worth the risk?


There are many types of investment which pay above market returns. The problem is that every now and then there can be a big crash which can take away the profits and cause losses. These types of investments can give the illusion of being very comfortable when they are doing well. However, there is an asymmetry, because most years they will pay-off, but in a bad year they can be horrendous.

If an investment opportunity looks too easy, it's time to smell a rat.