Risk and reward
Things that can grow more can also drop more, and spreading out helps.
No free lunch
A savings account is safe but grows slowly. have grown much faster over long periods, but they can also drop a lot along the way. That trade is called risk and reward: a chance at bigger gains comes with a bigger chance of losses. just means the chance you lose money.
Big drops happen
The has had big falls:
- In 2008 it lost about 37% in one year.
- In early 2020 it fell about 34% in about a month, then climbed back within months.
People who panicked and sold at the bottom locked in their losses. People who waited, and kept buying, came out ahead.
Don't put all your eggs in one basket
Own one company and it fails? You could lose everything. Own hundreds and one fails? You barely notice. That's . An does it for you by owning a whole list of companies in one purchase.
Match risk to time
- Money you need soon belongs somewhere safe.
- Money you won't need for many years can take more risk, because it has time to recover.
Remember
- More possible reward usually means more possible loss.
- Big drops happen. Time and patience help you ride them out.
- Diversify: many baskets, not one.
- Short-term money stays safe. Long-term money can grow.
Check yourself
1. What does 'risk and reward' mean?
2. What is diversification?
3. Where should money you need next month be kept?
You finished the written lessons in Money basics. Back to all levels
Money Tree School is education, not financial advice. Examples use made-up or historical numbers to show how things work; they are not recommendations to buy or sell anything. Markets can lose money.