Every return has a source. If one offer promises more than another, the question is: which risk is that extra return the price of?
If you cannot find the answer, the risk has not disappeared — you simply have not been told about it.
Two different risks
Confusing these is one of the most expensive mistakes available.
- Volatility — the price moving up and down. Uncomfortable, but not in itself a loss. It becomes one only if you sell at that moment.
- Permanent loss — the capital does not come back: the company closes, the project stops, the money cannot be recovered.
Volatility is resolved by time. Permanent loss is not.
Not all the eggs in one basket
Being tied to one company, one sector or one country does not raise your return — it only raises the chance that a single event stops you entirely. Spreading does not guarantee a return, but it stops one mistake from taking everything.
Real return
Inflation reduces the figure invisibly. A 10% annual return with 12% annual inflation is a loss. That is why a return should always be thought about after inflation.
For the same reason, "taking no risk at all" is also a choice, and it too has a price: money kept under a pillow loses part of its value every year.
There is no high return without risk. An offer that appears to be one is either hiding the risk or is a scam.
After this lesson
The next lesson describes the kinds of investment neutrally — without saying which is right for you.