Risk and return are related. What does this investment principle mean?

Over the long run, riskier (more volatile) investments have a greater return than lower risk investments. For example, in any period that's long enough, stocks trounce bonds. The theory is that people won't put money in riskier investments if they don't get rewarded with higher returns.

If you put it all on red you can double your money quick. You can lose it all just as quick. If you stuff your money into a savings account you won't lose anything in dollars but you won't make more than inflation and might make less. You have to gamble some to win the more risk your money will take the greater the swing in outcomes.

It depends on your own definition of risk and reward. The more risk you can take the less risky it is. If your stake was $100 and you could make $50 more or lose $50 by investing would you think this was risky? How about +/- $40, or +/-$30? How about investing $100 and either making $80 or losing everything, which is more risky to you? The more information you have about an investment the less risky it should be, if it is accurate information.
Usually high risk means high potential return, but potential is the "disclaimer" word.

Investments that are safe don't return you as much money. Generally the more risk you take the higher potential return you expect. e.g. If you can get 5% return on an guaranteed government bond then in order for you to buy a bond from a corporation (which has more risk than the government) they would have to temp you with more than 5%. For bonds risk also relates to the length of the bond e.g. the longer the term before you get your investment the risker the investment is. There is a greater chance of inflation, interest rates going up, the company going out of business etc. So usually, a short term bond will pay you less because your risk is less.


The same holds true with stocks - usually investing in a major global company's stock would be less risky and therefore you should expect a lower returen than investing in a unknown new company.