You’ve probably heard something like “take more risk and you’ll get more return.” While this is a common claim, it doesn’t work that way. Reality is much more complex. It’s true that risk and return always come together, but the relationship between them is often presented inaccurately. The idea that “if you take more risk, you’ll necessarily get more return” is simply not correct. You need to understand the real relationship between return and risk before entering the world of investing.

What’s the principle here?

There’s no return without risk, and no risk that guarantees return.

The higher the potential return an asset is meant to yield, the greater the chance it will lose value.

There are no guarantees, no divine rewards, and no “law of nature.”

As smart investors, you need to make sure that in most likely scenarios you won’t suffer a financial knockout.

There’s No Such Thing as Risk-Free Investing

Anyone who promises you a “risk-free investment” is lying. Always. There’s risk in getting out of bed in the morning, so clearly there’s also risk wherever your money sits: in the bank, in the capital market, and certainly under the mattress. Even cash in the bank loses value, even deposits aren’t completely immune, and of course, a “crazy opportunity” can turn out to be a trap or just a failure.

So What Actually Counts as Risk?

When talking about risk in investing, it refers to any situation where something bad can happen to your money:

1. The asset you hold decreases in value
2. Or is completely wiped out, meaning its value becomes literally zero (yes, this happens. In particularly severe cases, an asset can even create debt!)
3. A sharp and rapid drop in the asset’s value (even if it recovers later)
4. Lack of liquidity: you’re “rich on paper” but can’t access the money when convenient
5. Erosion of money’s value (inflation)
6. Risk of non-repayment of a loan in the case of specific bonds or peer-to-peer lending

All of these are part of the game. This doesn’t mean “risk is bad,” but rather that risk simply exists, and you need to know how to manage it. That’s essentially the entire art of investing.

The Real Relationship Between Return and Risk

The higher the potential return an asset is meant to yield, the greater the chance it will lose value. That’s it. There are no guarantees. No divine rewards. And no “law of nature.” The more you invest in a high-risk asset, the higher potential for greater return comes alongside higher potential for losses. For example: companies trying to “conquer the world” (whose stocks you buy) fail more often than solid businesses. If they do succeed, their potential is higher. But if they fail, it will hurt much more. They can reach a value of zero, or even accumulate debts. Risk and return go together, but not symmetrically, and without guarantees of success.

The Risk Ladder in the Investment World

Here are some general and simplified examples of risk levels in the investment world:

Holding Cash in the Bank

Very low risk, but it exists.

The main risk: inflation – which can be high or low.

We know with fairly high certainty that 100 shekels today will buy significantly less in a decade.

Bonds (Through Indexes/Baskets)

Low risk, especially if buying ETFs or index funds of bonds – which spread our risk among several entities.

As investors, we know in advance what the expected return is – which is usually low – but there’s still a possibility that the entities we lent money to won’t meet their payments.

Stock Indexes

Medium-high risk.

Historically, stock indexes can lose even 30% of their value in a week or less, and yet – historically the stock market also recovers. It’s simply a question of how long the recovery takes.

Real Estate

Here it really depends: an apartment without a mortgage in a student area? Relatively low risk. An entrepreneurial partnership in the US with leverage? Very high risk.

You can’t put all real estate “in one basket.”

Individual Stocks
Individual stocks are among the most covered investments in the financial press, and for good reason: it’s because they have stories behind them that can be conveyed with all the juice and drama that news loves to deliver. The place where miracles happen is also the place where disasters occur.

For example:

• “Nvidia rose 2,500% in five years” – amazing and creates FOMO.
• “Intel plunged 50% in a year” – painful and scary.

The more specific the asset (because an individual stock represents ownership in a specific company), the higher the risk level jumps.

Alternative Investments, Leveraged, Crypto, NFT
Here “abnormal profit is possible,” alongside the risk of complete and very rapid collapse.

Unlike stocks, there’s no regulator in the picture, no laws, and no one to protect you from fraud. You’ve been warned.

The main message is – there’s no return without risk, and no risk that guarantees return.

“Investments” That Are Simply Mistakes

Speaking of high risk, let’s mention the promises of “an opportunity that won’t come back,” “30% return per month,” “a method that definitely works.”

There are plenty of dream sellers who present baseless ideas as legitimate investments, and people fall for them because of greed and hope for quick profit.

If someone is selling you an abnormal return, it’s because the risk is abnormal. And abnormal risk, in the vast majority of cases, ends in total loss. Not “a small loss.” Total. All the money. If it sounds too good to be true, it probably is exactly that.

In Conclusion

There’s no return without risk, and no risk that guarantees return.

Within the things under your control, you can manage risks (for example, by avoiding basic investment mistakes). This is easier when you understand what the possible risks are, and in any case you need to understand that you can’t eliminate all risks completely. As smart investors, you need to make sure that in most likely scenarios (scenarios you’re able to anticipate) you won’t suffer a financial knockout. This ability is exactly the difference between those who will succeed in staying in the game long-term and those who will give up midway, after too great a risk materialized on their heads.

Step by step

1. Before you invest, understand what level of risk you’re willing to take. There’s no right or wrong answer, but it’s important that you know what you’re willing to “absorb.”
2. Remember that higher risk doesn’t guarantee higher return. It only opens the door to that possibility, alongside the possibility of loss.
3. Diversify your investments. Don’t put everything you have on one single asset.
4. Avoid basic investment mistakes. In most cases, avoiding mistakes is more important than trying to “identify the next investment.”