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Beginner · Lesson 4 of 8Risk and return
Higher expected returns come with higher risk. Cash in a bank is very safe but has historically earned little above inflation. Shares have historically earned more over long periods but can fall 30-50% in a bad year.
Risk has several meanings. Volatility is how much prices swing. Permanent loss is when a business fails and the money never comes back. Inflation risk is when safe money slowly loses buying power. Liquidity risk is not being able to sell when you need to.
Your time horizon changes which risk matters most. Money needed in two years should not depend on the share market. Money needed in twenty years can usually ride out falls, and the bigger risk becomes not growing enough.
Key takeaways
- There is no reward without some kind of risk.
- Volatility is not the same as permanent loss.
- Match the investment to when you need the money.
Check your understanding
1. Which risk is greatest for cash held for 30 years?
- Volatility
- Inflation eating its buying power
- Company bankruptcy
- Currency crashes
Show the answer
Inflation eating its buying power. Over long periods inflation quietly erodes cash.
2. Money needed for a house deposit in 18 months is best kept mostly in...
- Small growth shares
- Crypto
- Cash or term deposits
- Options
Show the answer
Cash or term deposits. Short horizons cannot wait for markets to recover.
Go deeper
- Wikipedia: Risk–return spectrum
- YouTube videos: risk and return investing explained
- Investopedia: risk return tradeoff
- Moneysmart (ASIC): risk and return
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