Video courses › The basics: saving, inflation, risk › Lesson 4

Risk and return always go together

Why there is no high return without risk, what the main types of risk are and how to spot a promise that does not hold up.

Video lesson in preparation (AI-generated presenter). Full text below.

Lesson text

In finance, return is what an investment gives back above, or below, what was put in. Risk is the uncertainty about that result: the possibility that it turns out different, even very different, from what was expected. The two are linked. Whoever accepts more uncertainty asks in exchange for the possibility of a higher return; whoever wants more certainty must settle for less.

This link is the most important rule to remember, because it protects against fraud. If someone offers a return that is high, safe and quick, one of the three is not true. Supervisory authorities repeat it in every information campaign: the promise of high gains without risk is the most typical sign of an offer to stay away from.

Risk has many faces. There is market risk: prices go up and down. There is credit risk: the issuer of a bond may fail to repay it. There is liquidity risk: not being able to sell when you want, or only at a low price. There is currency risk for instruments in another currency. And there is inflation risk, which also affects money left idle.

Then there is the difference between the risk an instrument carries and the risk a person can bear. The capacity to bear risk depends on the time available, on income, on existing commitments and also on temperament: someone who sells everything at the first fall turns a temporary decline into a permanent loss. Knowing yourself on this point is as much part of financial education as knowing the instruments.

In three points

• A higher expected return always comes with higher risk.
• High, safe and quick together do not exist: it is the typical sign of a scam.
• Risks come in different types (market, credit, liquidity, currency, inflation) and each must be weighed against your own situation.

Educational and informational content only. It is not personalised financial, investment or tax advice. All investments involve risks, including the possible loss of invested capital.

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