The risk-return spectrum
It’s important to remember that risk is about balancing the chances of a loss with the benefits of a higher return over time, while volatility – the inevitable ups and downs of the market – is an integral, often short-lived part of investing.
A higher level of investment risk—usually found in individual equities—often means that the potential for growth is greater, but there’s also a greater possibility that your investment might fall. Cash funds, on the other hand, carry lower risk but with that come lower potential returns.
When it comes to your own portfolio your tolerance for risk will help you decide which assets to invest in and how much to afford them. Once this is decided and your blend of assets is in line with your goals it’s all about letting time do the work so try not to focus on short-term market fluctuations but on the long-term potential of your investments.
This image shows a spectrum moving from the left where assets with lower risk bring lower growth potential towards the right, where assets carrying higher risk bring the potential of higher growth.
Explore more principles for good investing
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