Risk and return

Education, not advice. This lesson is general information, not personal financial advice. The value of investments can go down as well as up, and you may get back less than you put in.

The first time my investments dropped, I nearly sold everything. I’m very glad I didn’t.

Risk and return go together

Return is how much your investment grows. Risk is how much it can go up and down along the way, including the chance you lose money.

The basic rule of investing:

Higher possible returns come with higher risk.

Savings accounts barely move, but grow slowly. Shares in companies can grow much more over time, but they can also fall sharply, sometimes by a third or more in a bad year. There’s no investment with high returns and no risk. If someone offers you one, it’s a scam.

Time changes the risk

Over a few months, investments are unpredictable. Over many years, the ups and downs tend to even out, and historically, broad investments in shares have grown more than savings over long periods. Past performance doesn’t guarantee future results, but this is why investing is for long-term money.

The longer you can leave money invested, the more risk you can usually afford to take.

Don’t put all your eggs in one basket

Diversification means spreading your money across many different investments, so one bad one can’t sink you.

If you put everything into one company and it fails, you could lose it all. If you own small pieces of hundreds of companies, across different industries and countries, one failing barely matters.

The easiest way to diversify is through funds, which you’ll meet in the next lesson.

When markets fall

Markets fall regularly. It’s normal, and it’s part of investing. When it happens:

• Don’t panic-sell. Selling after a fall turns a temporary drop into a permanent loss.
• Keep investing regularly. When prices are lower, your monthly amount buys more.
• Remember your timeline. If you don’t need the money for 10 years, this month’s price matters very little.

This is also why your emergency fund matters: it means you never have to sell investments in a hurry.

That first drop recovered. Since then, I check my investments far less often. It’s easier to stay calm when you’re not watching every day.