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Understanding the relationship between risk and return will help you choose the right investments. Generally speaking, investments that have greater investment upside also have greater potential risk
The simplest way to illustrate this is with examples:
Fortunately there are ways to reduce risk.
Investments with high potential return can be volatile in the short term but tend to be more consistent over longer time periods. For example, if you invest in the Australian share market for a period of 12 months, there is a reasonable chance of a negative return. If you invest for ten years, the chance of a negative return is lower.
Diversification involves spreading your investments across a number of asset classes (shares, property, fixed interest, cash), a number of sectors within those asset classes and a number of quality assets within those sectors.
A well-diversified portfolio means that poor performance in one area is less likely to destroy your overall portfolio. Hopefully other asset classes or sectors will perform better and will compensate.