Why risk and return work together

By now, we’ve talked about saving, how money grows, and different ways to invest. This is where all of it comes together. Whenever people talk about investing, two words always appear: risk and return.

Return is what you hope to earn.

Risk is the chance that things don’t go exactly the way you expect.

The reason they’re always mentioned together is because you rarely get one without the other.

Think about the safest place we have learnt to invest your money: a savings account. There is almost no uncertainty in a savings account because your money sits there, untouched, growing very slowly at a fixed interest percentage which also means there’s not much growth. In this case a Lower risk gives a lower reward

However, when you invest your money in stocks, instead of knowing exactly what will happen, you accept that some years might be better than others. Sometimes the value rises, sometimes it dips. That uncertainty is the risk and it’s also the reason higher growth is even possible in the first place. Here the higher risk gives higher rewards when the stock does well. 

Different investments, different levels of risk

Not all investments take the same amount of risk.

• Stocks usually offer higher growth, but their prices move often and can feel unpredictable.

• Bonds are steadier and more predictable with a fixed interest rate, but they grow more slowly.

• Mutual funds usually fall somewhere in between, because risk is spread across many investments. Within mutual funds, different types carry different levels of risk: equity mutual funds are generally riskier but offer higher return potential, while debt mutual funds are more stable with lower returns.

The Role of Time

Risk feels very different depending on how long you’re investing for. If you need money next month, uncertainty is a problem and safety of the investment would be a priority. But if you’re investing for the next 10, 20, or 30 years, short-term ups and downs matter far less.

Time gives investments room to recover, adjust, and grow. That’s why younger investors can usually afford to take more risk, not because they’re reckless, but because they have time on their side.