What are risk, return and diversification?

Every investment trades risk for return. Money in a bank deposit is safe but grows slowly. Shares can grow much faster over many years, but their prices can fall sharply along the way. Crypto can swing even more. In general, the higher the hoped-for return, the bigger the possible loss. Diversification means not putting all your money in one place. If you own shares in twenty companies across different industries, one company's bad year hurts much less. Owning different kinds of assets, such as deposits, bonds, shares and property, spreads risk further, because they rarely all fall at once. A mutual fund is an easy way to diversify with a small amount, since one unit gives you a slice of many holdings. Two more ideas help. Your time horizon: money you need next year should not be in shares, while money for retirement in twenty years can ride out the ups and downs. And your own tolerance: if a 30 per cent fall would make you sell in a panic, hold less in risky assets. Be wary of anyone who promises high returns with no risk; that promise is the most common sign of a scam.