What is the link between risk and return?
A high yield casts a long shadow.
The brighter something shines, the longer the shadow it casts. Behind a promise of high returns lies a matching risk — and “high returns with no risk” is the classic signal of fraud.
In 30 seconds
- Every investment carries some degree of risk, and that risk is reflected in the return you can expect.
- If your money is perfectly safe, the return will most likely be low. High returns come with high risk.
- An offer of “huge upside and almost no risk” is a sign of extreme risk or outright fraud.
There is no guaranteed return.
Every investment carries some degree of risk.
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Risk and return
The SEC’s investor site says that “guaranteed returns” aren’t: every investment carries some degree of risk, which is reflected in the rate of return you can expect to receive.[1]
The safer it is, the lower the return.
Money that is perfectly safe usually earns only a low return.
“Big and risk-free” is a signal.
An offer to grow money hugely with no risk is a sign of fraud.
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The classic words
The SEC warns that claims of “incredible gains” or “huge upside and almost no risk” are hallmarks of extreme risk or outright fraud.[1]
The script of being asked for fees at withdrawal is covered in “Look at the exit before the entrance.”
How much loss can you bear?
Risk tolerance is whether you can accept losing some or all of the original money.
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Risk tolerance
The SEC describes risk tolerance as your ability and willingness to lose some or all of your original investment in exchange for potentially greater returns.[2]
It differs from person to person. Before the numbers, consider how much you could afford to lose.
A scale for reading the shadow.
A scale for reading risk and return.
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What the risk is
What could happen, and how much you would lose.[1]
Promises of return
Whether words like “guaranteed” or “risk-free” appear.[1]
Your own tolerance
How much loss you could accept.[2]
This is not advice
This edition explains the relationship between risk and return. It does not recommend any investment or promise any return.
Next question
NEXT QUESTIONDon’t put all your eggs in one basket.NEXT QUESTIONLook at the exit before the entrance.See the Field Notes shelf →What this edition cannot tell you
- Past returns and risk figures by investment. Not covered here.
- A detailed explanation of how risk is measured in numbers.