World 9 · Investing & wealth building · Lesson 2 of 16

Risk, return and volatility

Higher possible returns usually come with bigger swings and bigger chances of loss.

7 min read · Level: Foundation · Free — no account needed to read

The idea

In investing, risk and return are linked. Investments that might grow more — such as company shares — usually swing more in value and carry a greater chance of loss. Investments that are steadier — such as cash savings or high-quality government bonds — usually grow more slowly. There is no reliable way to get high returns without accepting more risk.

Volatility is how much and how quickly an investment’s value moves up and down. A volatile investment can fall sharply in a month and recover over years, or not recover at all. Volatility is uncomfortable, but for money that will not be needed for decades, short-term swings matter less than the long-term direction. For money needed soon, the same swings can be a serious problem.

Why it matters

Knowing that risk and return travel together is the best protection against anyone promising the first without the second.

A real example

The situation

Two colleagues each put a similar amount aside. Nils keeps his in savings; Vera invests hers in a broad mix of shares.

What happened

In the first year, Vera’s investment falls by a fifth and she feels anxious, while Nils earns a little interest. Over the following decade, Vera’s investment grows considerably more than Nils’s savings — though it fell twice more along the way.

The takeaway

The higher long-term growth came together with real periods of loss.

How people actually behave

People feel losses much more strongly than gains, so volatility tends to push them to sell after falls — often at the worst time.

Common mistakes

• Believing there are high returns without risk.
• Taking high risk with money needed soon.
• Selling in a panic after a fall in a long-term investment.

Questions to think about

• How would you honestly feel if an investment fell by a third in a year?
• Which of your goals could live with that kind of swing, and which could not?

Try it: Match risk to time

1. List your goals with how many years away each is.
2. Mark which could handle big swings in value and which could not.
3. Keep money for the near-term goals out of volatile investments.

Words in this lesson

• Risk — The chance that an outcome differs from what you expect — in money, often the chance of loss.
• Return — What an investment gains or loses over a period, often shown as a percentage.
• Volatility — How much and how quickly an investment’s value moves up and down.