Risk vs. Reward: The Seesaw of Investing

The Golden Rule: No Free Lunches

Think of investing like choosing a path for a hike:

• The Flat Path (Low Risk): It’s safe, easy, and you’re unlikely to trip. But you won’t get much of a view, and it takes a long time to get anywhere. (Example: Savings accounts or Fixed Deposits).

• The Mountain Trail (High Risk): It’s steep, rocky, and your legs might hurt. There’s a chance you might slip. But the view at the top is spectacular, and you reach a higher elevation much faster. (Example: Stocks).

Risk is simply the "price of admission" for higher returns.

The Relationship

Generally, the relationship between risk and reward is a straight line:

• Low Risk = Low Potential Return: Your money is safe, but inflation (the rising cost of bread and milk) might actually make your money less valuable over time.

• High Risk = High Potential Return: You could double your money, but you could also see it drop by 20% in a single month.

What Kind of "Hiker" Are You?

Your "Risk Appetite" depends on two things:

1. Your Timeline: If you need the money in 6 months, don't take the mountain trail! You don't have time to recover if you slip.

2. Your Sleep: If a 5% drop in your account makes you lose sleep, you should stick to safer paths.