Part 2 – Risk, Return, and Your Goals
1. The basic idea of risk and return
Every investment has two key sides: the return you hope to earn and the risk that things may not go as planned.investor+1
Return is what you gain above your original investment, while risk is the chance that you may lose some or all of your money.studysmarter+1
Generally, higher potential returns come with higher uncertainty and a bigger chance of loss, while safer investments usually offer lower, more stable returns.bajajfinserv+1
2. Types of risk beginners should know
As a beginner, you do not need to know every technical category, but you should recognize a few common risks.fca+1
- Market risk: The value of your investments can fall because the overall stock market goes down.money.tmx+1
- Company risk: A specific company can perform badly or even fail, which can sharply reduce its stock price.studysmarter+1
- Liquidity risk: Sometimes it can be hard to sell an investment quickly at a fair price when you need cash.fca+1
- Emotional risk: Fear and greed can push you to buy high and sell low if you react too strongly to short‑term moves.findex+1
Understanding these risks helps you choose investments that match your situation and avoid taking on more danger than you can handle.investor+1
3. Time horizon and risk tolerance
Your time horizon is how long you plan to keep your money invested before you need it.money.tmx+1
If you have a long time horizon, such as 10 years or more, you can usually take more risk because you have time to ride out market ups and downs.findex+1
If you need the money within a few years, it is usually safer to take less risk and focus more on protecting your capital.money.tmx+1
Your risk tolerance is how comfortable you feel with seeing the value of your investments go up and down.sarasinandpartners+1
Two people with the same time horizon can have very different emotional reactions to volatility, so you must be honest about how much loss you can accept without panicking.sarasinandpartners+1
4. Setting clear investment goals
Before buying any stock, write down why you are investing and what you want the money to do for you.investopedia+1
Common goals include building retirement savings, funding education, buying a home, or simply growing wealth over the long term.ibullssecurities+1
A useful method is to make your goals specific, measurable, achievable, relevant, and time‑based (often called “SMART” goals).investopedia+1
For example: “I want to invest 300 dollars per month for 15 years to build a retirement fund of at least 100,000 dollars” is clearer and more practical than “I want to get rich.”ibullssecurities+1
5. Matching goals, time, and risk
Once you know your goals and time horizon, you can choose an appropriate level of risk.findex+1
- Short‑term goals (1–3 years): Focus on safety and liquidity, because you may need the cash soon.ibullssecurities+1
- Medium‑term goals (3–10 years): Use a balanced approach that mixes growth and stability.money.tmx+1
- Long‑term goals (10+ years): You can usually accept more volatility and invest more in growth assets like stocks.findex+1
Always remember: you should never invest money in high‑risk assets if you cannot afford to lose it or if losing it would seriously damage your life plans.fca+1