In Chinese philosophy, yin and yang are opposing but interrelated forces dominating the natural world. In the realm of investing, risk and return assume this dual role. They are opposing but interconnected and interdependent forces.
If you can accept that all things must find a balance between yin and yang, then so too must risk and return find a balance. When considering a particular investment, you need to examine it for its balance of risk and return.
In terms of investing, "risk" refers to the possibility of losing invested capital, in whole or in part. It also refers to the volatility of the investment with respect to price changes. Risk is an integral part of investing. Generally speaking, the higher the risk, the higher the returns are expected to be to justify the risk.
Return is the increase in value (income or capital gain) of the investment, expressed as a percentage of its original value. Return often operates as a function of risk.
The percentage of return on investments can be negative (as well as positive).
The purpose of investing is to achieve your financial goals. The ideal investment would provide you with the maximum return for the minimum risk; however, realistically, a portion of both risk and return must be in every investment. Therefore, the following principles apply.
As with yin and yang, risk and return can be both good and bad. As an investor you must:
In addition to risk and return,there are three other aspects of investing that you should be aware of before you start making investment decisions. They are: