What is the relationship between risk and return? 3 principles to avoid failure in investing

[Summary]

There is a proportional relationship between risk and return, and there is basically no such thing as ``low risk and high return''. The important thing is to understand the true nature of risk and take the approach that suits you. This article explains three principles and practices to avoid failure.

Basic relationship between risk and return

Conclusion: Return is compensation for risk

One word explanation

Risk = variation in results (uncertainty)

Detailed explanation

With investments, future prices cannot be predicted. Therefore, there is always a "swing range" in returns.

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• Small fluctuation → stable but low return
• Big fluctuation → unstable but high return

points

• Low risk = unsafe (lose inflation)
• High risk = not dangerous (growth opportunity)

Principle 1: Risk cannot be reduced to zero

Bottom line: Manage, not avoid

reason

Risk exists with any asset.

Specific example

• Cash: Inflation risk (decreased purchasing power)
• Bonds: Interest rate fluctuation risk
• Stocks: Price fluctuation risk

Practical points

• Choose which risks to take
• Reduce unconscious risks

Principle 2: Risk can be diversified

Conclusion: Just avoid concentration to stabilize

One word explanation

Variance = combining different price movements

Type of dispersion

• Assets: stocks, bonds, cash
• Region: Domestic/Overseas
• Time: Lump sum vs accumulation

mini comparison

Principle 3: Risk changes over time

Conclusion: The longer the period, the more stable it is

reason

In the short term, the influence of chance is large, but In the long term, economic growth is more likely to be reflected.

practice

• Long-term holding (5-20 years)
• Regular savings

Common failure patterns

• Jumping to “low risk and profitable”
• Stop investing due to short-term losses
• Becomes bullish only when it goes up

How to use it in practice (important)

Bottom line: Design according to your risk tolerance

step

1. Secure living funds (6 months to 1 year)
2. Decide on the amount you can invest
3. distributed and distributed

Example (beginner)

• Stock: 60%
• Bond: 30%
• Cash: 10%

Summary

• Return is compensation for risk
• Risk cannot be eliminated, but it can be reduced.
• Basic strategy is long-term + diversification

action steps

• ① Check your own acceptable risk
• ② Start diversified investment
• ③ Continuing over the long term