Chapter 05 · Intermediate · 6 min read
Risk & Return
Why more return usually means more stress
Understand volatility, drawdowns and the risk of reacting at the worst moment.
Return never tells the whole story
One investment grows from €10,000 to €10,500. Another reaches €14,000 but was worth €7,000 six months earlier. The ending number hides a very different emotional journey.
How much a price swings up and down along the way. describes how sharply prices move. Your own behaviour when prices fall is one of the risks that matters most.
Diversification and drawdowns
Five ETFs can still be concentrated if they all own the same giant technology companies. Correlation helps show whether investments tend to move together.
A fall from €100,000 to €80,000 is a 20% drawdown. Returning from €80,000 to €100,000 needs a 25% gain. Losses and recoveries are not symmetrical.
Words worth knowing
Open dictionary- Volatility
- The size and frequency of price movements.
- Drawdown
- A fall from a previous portfolio high.
- Correlation
- How closely two investments tend to move together.
After a 20% loss, what gain returns you to the starting value?
Try it yourself
Write down the largest temporary fall you could tolerate without abandoning your plan.
Can you spot it?
A portfolio owns global stocks, the S&P 500, Nasdaq and an AI ETF. Is the number of funds proof of diversification?