1. Return is what your money earns or loses
Return can come from interest, dividends, rent or change in asset price. It can be positive or negative.
Tip: Always ask where the return is supposed to come from.
2. Risk is uncertainty around the outcome
Market falls, borrower default, inflation, illiquidity, concentration and currency movement are all different risks.
Note: Low volatility does not mean zero risk.
3. Higher expected return usually requires bearing risk
If one investment promises much higher return with no meaningful downside, investigate how the return is generated and what risk is hidden.
Note: High return with guaranteed safety is a scam warning.
4. The right risk is the risk you can survive
Your time horizon, emergency reserve, job stability and goal importance determine how much loss or volatility your plan can tolerate.
Tip: Investment risk should fit your life, not your excitement level.
5. Quick check
An investment promises 18% guaranteed with no risk. What should you do?
Answer: B - Unusually high guaranteed returns deserve strong scrutiny.