Balancing risk and return

To make the right decisions about saving and investing, you need to understand the relationship between risk and return.

Firstly risk and return are directly related:

the greater the risk of an investment losing money, the greater the potential for making money. Or to put it another way, if an investment is very risky, the amount of money you could make out of it if it pays off can be very high. Equally, if an investment has a very low risk, the amount you stand to earn on it may also be low. Other factors you will need to consider for investments are; how long you want to invest the money for and whether you need quick access to it at any time during the investment period.

• investing in stocks on the stock market can be very risky, as the chances of making a profit are difficult to predict; with volatile (fast moving) stocks profits can be very high, and so can losses - therefore extreme caution is required.

• putting your money in a bank or building society savings account carries a very low risk, but the returns (the interest you earn on the money in your account) are also relatively low.

When making decisions on how to invest, you have to balance the risk and the return - so if there is an investment opportunity with lower risk and a potentially better than average return, this could be a better option for most people than an investment with potentially much greater return and a higher risk. You should consider balancing low risk investments with some higher risk ones.