Risk, return and diversification
The relationship behind every investment decision, explained without jargon.
In general, investments with higher potential returns carry more uncertainty. Anyone promising high and guaranteed returns at the same time is, at the very least, hiding part of the story.
Types of risk
- Market risk: the asset's price fluctuates.
- Credit risk: whoever received the money may not pay it back.
- Liquidity risk: it may be hard to sell quickly without losing value.
Diversifying means not depending on one thing
Spreading money across assets that don't move together reduces the impact of an isolated problem. Diversification doesn't eliminate risk, but it keeps a single mistake from deciding the whole outcome.
