Risk-Return Tradeoff

Key Highlights

• The risk-return tradeoff is a basic idea in investing: the more risk you take, the higher your potential reward - but also the higher the chance of loss.

• On the flip side, safer investments usually offer lower returns.

What is the Risk-Return Tradeoff?

The risk-return tradeoff is a basic idea in investing: the more risk you take, the higher your potential reward - but also the higher the chance of loss. On the flip side, safer investments usually offer lower returns.

Key Points to Know

• Higher Risk, Higher Reward: To earn more, you need to take bigger risks. Safe choices generally offer smaller gains.

• Know Your Comfort Level: Everyone has a different risk tolerance based on their goals and how comfortable they are with ups and downs.

• Diversification Helps: Spreading your money across different investments reduces the risk. If one performs poorly, others might balance it out.

Examples

1. Low-Risk Options: Savings accounts or government bonds are stable but offer modest returns (1-3% per year).

2. High-Risk Choices: Stocks, especially in fast-changing sectors, can give higher returns (10-20% or more) but are more unpredictable.

Why It Matters?

• Better Decisions: Understanding risk helps you choose investments that match your goals.

• Balanced Portfolio: Mixing safer and riskier options creates stability and growth.

• Long-Term Planning: It guides your strategy for goals like retirement or saving for big expenses.