Začínáme s investováním
Return and Risk Made Simple
Key takeaways
- Return is the profit from an investment expressed as a percentage — it shows how much your money has grown.
- Risk is uncertainty about future performance — the higher the possible return, the greater the volatility and the possibility of loss.
- There is no high return without risk — offers of a "guaranteed 20% return" are always a fraud or extreme risk.
- A long investment horizon and diversification are the main tools for reducing risk.
Return is the profit from an investment; risk is the uncertainty of that return — these two concepts are inseparably linked and every investor must understand them.
What is return?
Return (also called return on investment) tells you how much your investment grew over a given period. It is expressed as a percentage. Example: you invest CZK 10,000 and after one year you have CZK 10,700. The return is 7%.
We distinguish two types of return:
- Capital gain — the price of the investment has risen (you bought at 100, you sell at 120).
- Income return — the investment pays you regular payments (dividends, interest).
What is risk?
Risk is uncertainty — how much the return can fluctuate or how large a loss you might sustain. Low-risk investments (savings accounts, government bonds) offer low returns. High-risk investments (individual stocks, cryptocurrencies) offer high potential returns but also the possibility of significant losses.
How are return and risk connected?
In investing the relationship is direct: if you want a higher return, you must accept higher risk. A savings account gives 3–4% at virtually no risk. A global equity ETF has historically given 7–10% per year but fell by as much as 40–50% in crises. A cryptocurrency could grow by hundreds of percent, but also lose 80%.
How to reduce risk?
You cannot eliminate it entirely, but there are two powerful tools:
- Diversification — spread your money across many different assets. The fall of one company will not destroy you if you hold thousands of companies through an ETF.
- Long horizon — the longer you invest, the more short-term volatility evens out. Historically every 10-year period in global stocks has ended in profit.
How to apply these principles when choosing an ETF is explained in the article Investing for complete beginners: first steps.
FAQ
How do I know what level of risk I can tolerate?
It depends on two things: your investment horizon and how much a portfolio decline would shake you. If a 30% temporary fall would cause you to sell out of fear, put some money into less risky assets (bonds). The longer your horizon, the more risk you can afford.
Is a 7% annual return realistic or just theory?
The historical average real return (after subtracting inflation) of the global stock market was approximately 5–7% per year. Nominally (without subtracting inflation) it was 7–10%. Past returns do not guarantee the future. This is a historical average over decades, not a guaranteed number every year.
Are bonds always safer than stocks?
Generally yes — government bonds of developed countries are less volatile than stocks. But they are not without risk. In high-inflation periods bonds lose real value. Corporate bonds carry the risk of the company going bankrupt. And if interest rates rise, existing bonds lose market value.