Risk and Return: The Basic Trade-Off

In investing, risk and return are fundamentally linked. Investments with higher potential returns generally carry higher risk, and lower-risk investments typically offer more modest returns.

What Is Risk?

Risk is the possibility that an investment's actual return differs from what you expected — including the possibility of losing money. It comes in many forms:

• Market risk: The overall market declines
• Company risk: A specific company performs poorly
• Currency risk: Exchange rates move against you

What Is Return?

Return is what you earn (or lose) on an investment. It includes price changes and any income (like dividends). Returns can be positive or negative.

The Trade-Off

Historically, stocks have delivered higher average returns than savings accounts — but with significantly more volatility. A savings account is stable but grows slowly. Stocks can grow faster but can also lose value.

Time Horizon Matters

Longer time horizons generally allow investors to tolerate more short-term volatility, because there is more time for markets to recover from downturns.