Risk and return: the fundamental trade-off

Every investment decision balances two things: the return you hope to earn and the risk you take to earn it.

What "risk" really means

Risk is the chance an investment's value falls, or doesn't grow as hoped. It shows up as volatility (how much the price bounces around) and, at worst, permanent loss.

The trade-off

As a rule, assets that offer higher expected returns also carry higher risk:

Lower risk / lower return	Higher risk / higher return
Cash, savings accounts	Individual company shares
Government bonds	Emerging-market funds
Diversified bond funds	Property, commodities

Managing risk

• Time horizon: the longer you can stay invested, the more short-term dips you can ride out.
• Diversification: spreading money across many holdings softens the blow if any one falls. See diversification.
• Risk capacity vs tolerance: capacity is how much loss you can afford; tolerance is how much you can stomach. Invest within both.

Key takeaway

There is no high return without risk. The goal isn't to avoid risk entirely — it's to take appropriate risk for your goals and hold on through the bumps.