Every money decision trades something off. A savings account is safe but pays little. A share in a company can grow a lot, or lose value. Understanding risk and reward does not make you a trader. It helps you pick the level of risk that fits your life, so you can sleep at night.
This article is the reading companion to the free Mondosol lesson Money Matters: Risk & Reward, part of the Money course. Read it, watch the videos, or press play and listen first, then practise in the lesson.
Free: create your free Mondosol account to practise this lesson and track your progress.
In this article
The basic idea
Risk is the chance that the result is different from what you expected, including losing money. Reward (also called return) is what you hope to earn for taking that risk.
In general, the more reward an investment can offer, the more risk it carries. If something promises high returns with no risk, be suspicious. See our article on how to spot scams.
Types of risk
| Risk | What it means | Example |
|---|---|---|
| Market risk | Prices go up and down | Share prices fall in a downturn |
| Inflation risk | Prices rise faster than your money grows | Cash loses buying power over time |
| Interest rate risk | Rates change, which affects savings and loans | A fixed rate looks worse when rates rise |
| Concentration risk | Too much money in one place | Everything invested in one company |
| Liquidity risk | You cannot get your money out quickly | Money tied up in a property |
A simple risk ladder
From lower to higher expected risk, roughly. The order is a teaching tool, not a recommendation, and exceptions exist.
- Everyday and savings accounts: low risk, low return. Deposits are protected up to a limit in many countries.
- Bonds and fixed-rate products: moderate risk and return, depending on who borrows.
- Funds that hold many shares: higher risk, higher possible return over long periods, with big swings along the way.
- Single shares, crypto and speculative bets: highest risk. You can lose most or all of the money.
What decides how much risk is right for you
- Time horizon. Money you need next year should not be exposed to big swings. Money for 20 years from now has more time to recover.
- Ability to take losses. Do you have an emergency fund and stable income?
- Comfort with ups and downs. If a 20% drop would make you sell in panic, a calmer mix may suit you better.
- Goals. A holiday fund and a retirement fund do not need the same risk.
Build the safety net first: Make Money: Emergency Funds, Your Financial Safety Net.
Ways to reduce risk
- Diversify. Spread money over many assets so one failure does not sink you.
- Keep costs low. Fees reduce your return every year.
- Invest regularly in small amounts instead of guessing the best day.
- Understand what you buy. If you cannot explain it simply, wait.
- Avoid borrowing to invest. It multiplies losses as well as gains.
Watch: risk and return
Two videos explain the link between risk and return and the main types of investment. They are general education and not a recommendation.
Video: “Financial Education: Risk & Return | WMIsg” by WMIsg, on YouTube.
Video: “Every Type of Investment Explained for Beginners | The Financial Archives” by The Financial Archives, on YouTube.
Take it further
Reading is a good start. These options help you go from knowing to doing:
- Mondosol+: all courses, live coaching sessions and members-only events, with a 30-day money-back guarantee. See the plans.
- Investment Checklist (PDF): a simple step-by-step checklist from Mondosol. Educational, not advice.
- 1:1 coaching with Elio: a live session on Google Meet to turn this topic into your own plan.
Frequently asked questions
Is a savings account completely risk free?
Not completely. Your balance is usually safe, but inflation can lower what your money can buy. Check what deposit protection exists in your country and bank.
Does higher risk always mean higher return?
No. Higher risk means a wider range of outcomes, including worse ones. Only the possibility of a higher return grows, not the guarantee.
What is diversification?
Spreading your money across different assets, sectors and countries so that one bad result does not decide the whole outcome.
How much risk should a beginner take?
There is no single answer. Start with a safety net, only invest money you will not need soon, and learn before increasing risk. For personal advice, speak to a licensed adviser.
Can I lose more than I invest?
With normal funds and shares, no, you can lose what you put in. With borrowed money or some complex products, losses can be bigger. This is why beginners avoid them.
Curious how a real investing app works?
Read our independent eToro review: what you can trade, what it costs and the risks to know first. It is a look at one platform, not a recommendation to invest.
Affiliate disclosure: the review page contains affiliate links, so Mondosol may earn a commission if you sign up through them, at no extra cost to you. Investing involves risk and you can lose some or all of your money. Educational, not financial advice.
Keep learning
- Course: Money
- Lesson (Practise it): Money Matters: Risk & Reward
- Read next: Make Money: Make Money Work for You, How Saving and Investing Grow and Make Money: The Power of Saving and Compound Interest Basics
- Related: Compound Interest Explained
Educational, not financial advice. Mondosol is not a licensed adviser and does not recommend any product; the eToro link is a review, not advice. This post links to our eToro review page, which contains affiliate links (see the disclosure above).
Ready to practise? Create your free account and try the Money Matters lessons.
