No Risk, No Reward?

Interactive Video

[A woman sitting at a table, facing a balcony door with one hand on a laptop and a pen in the other hand.]

Narrator: “Risk and time are opposite sides of the same coin, for if there were no tomorrow there would be no risk. Time transforms risk, and the nature of risk is shaped by the time horizon: the future is the playing field.”—Peter L. Bernstein, Economist

[A balance scale with “risk” on one side and “rewards” on the other side. The balance scale swings back and forth.]

When you’re investing, there is a direct trade-off between risk and reward. Rewards are the extra money your money makes. The fancy term for this is return on investment, or ROI.

[A jar labeled, “Low-Risk Investments”, becomes half-full with money.]

If you play it safe and put your money in only low-risk investments such as money market accounts, you won’t lose money, but you won’t make much either. So, the risk in this case is missing out on high returns.

[A jar labeled, “High-Risk Investments”, becomes completely filled with money.]

On the other side, if you take big risks with investments, there are greater opportunities for high returns and higher possibilities of loss.

[A smiling woman looking down at the cell phone she is holding. Her thought bubble contains a balance scale with “risk” on one side and “rewards” on the other side. The scale swings back and forth while she’s thinking.]

So, it's all about finding the right balance between playing it safe and going for those potential big wins.

[A woman sitting at a table, facing a balcony door with one hand on a laptop and a pen in the other hand.]

When investors are thinking about where to put their money, they look at the risk/reward ratio. It’s a way to weigh how much money they could make against how much they might lose. 

[A machine with a conveyor belt that is labeled, “Investing.” A dollar bill enters the machine via the conveyor belt and comes out the other side as a $5 bill.]

For example, an investment that could earn $5 for every $1 invested has a risk-reward ratio of 1:5. It means the potential to make money is pretty strong, but so is the risk of losing money.

[A three-level pyramid. The bottom portion is labeled, “Low-Risk”.]

[On screen text]:

• cash
• CDs
• short-term government bonds

Think about an investment portfolio as a pyramid. At the base are the safest investments with highly predictable, low-risk, low-reward returns, such as cash, CDs, and short-term government bonds. These are like the foundation of your money portfolio, creating the support and balance for the rest of the investments. 

[The middle portion of the pyramid is labeled, “Moderate-Risk.”]

[On screen text]:

• blue-chip stocks 
• mutual funds
• corporate bonds
• real estate

In the middle of the investment pyramid are riskier but relatively safe investments focused on stable returns and growth. Examples include blue-chip stocks, mutual funds, corporate bonds, and real estate. 

[The top portion of the pyramid is labeled, “High-Risk.”]

[On screen text]:

• cryptocurrencies
• gems and metals
• futures and options

At the top, things get more unpredictable; you may lose money or get substantial payoffs. These investments can include cryptocurrencies, precious gems and metals, or futures and options.

[A man squinting his eyes in concentration while staring at his laptop. He is touching a section of his laptop screen with the pencil in his hand. There is a pyramid made of cash off to the side.]

The trick with this pyramid idea is figuring out how to stack your money in a way that feels right for you. It depends on how much money you have, how long you plan to keep it invested, and how comfortable you are with the chance of losing some of it.