March 23, 2025

A Beginner’s Guide to Risk, Return & Volatility

What You Need to Know

Investing can feel like stepping into the unknown, especially when you hear words like risk, return, and volatility thrown around. But understanding these concepts is key to making confident investment decisions that align with your goals and comfort level.

In this guide, we’ll break it down into plain English—no jargon, no overwhelm—just the essential information to get you started.

The Relationship Between Risk & Return

Risk and return are like two sides of the same coin—you can’t have one without the other.

Think about the small risks you take every day. You drive a car, step into the shower, or even try a new restaurant. You assess the situation, weigh up the potential outcome, and decide whether it’s worth it.

Investing works in a similar way. The more risk you take, the higher the potential reward—but also the greater the chance of loss. The key is finding a balance that works for you, which is why understanding risk—not just chasing returns—is so important.

Understanding Investment Risk

Risk in investing isn’t just about losing money (although that’s certainly a big one!). It actually comes in three main forms:

  • Losing some or all of your investment – No investment is guaranteed. Markets go up and down, and there’s always the possibility of ending up with less than you started with.
  • Inflation risk – Even if your investment grows, if it doesn’t outpace inflation, your money won’t go as far in the future. For example, if your investment returns 2% a year but inflation rises at 3%, you’re effectively losing purchasing power.
  • Volatility risk – Some investments experience big price swings. If watching your portfolio bounce around makes you nervous, managing volatility is key.

Risk isn't inherently bad—it’s just something that needs to be understood and managed.

Volatility: What It Means for You

Volatility refers to how much and how often an investment’s price moves up or down. A highly volatile investment might skyrocket one day and plummet the next. A low-volatility investment moves more steadily.

If you’re investing for the long term, volatility matters less because short-term ups and downs tend to even out over time. But if you need access to your money in the next five years, it’s usually best to keep it in cash to avoid the risk of needing to withdraw it during a market downturn.

A well-diversified investment portfolio—spreading your money across different asset types, sectors, and regions—can help smooth out volatility and reduce overall risk.

Finding Your Risk Comfort Zone

Everyone has a different relationship with risk. Some people are happy to take big risks in the hope of big rewards, while others prefer a steadier, more predictable path. There’s no right or wrong approach—it all comes down to what works for you. But understanding your personal risk tolerance is essential if you want to make investment decisions that align with your long-term financial wellbeing.

It’s also important to consider how much risk you’re comfortable with emotionally. Even if an investment strategy makes sense on paper, it won’t work for you if it causes sleepless nights every time the market dips. Investing should be about confidence and control, not stress and anxiety.

This is where having a solid financial plan becomes invaluable. A financial plan isn’t just about picking investments—it’s about defining your goals, understanding what you need your money to do for you, and structuring your investments accordingly. If you’re investing for a short-term goal, such as a home renovation, your approach will be very different from someone planning for retirement in 30 years. The timeframe of your investment has a huge impact on how much risk you can afford to take.

Final Thoughts

Investing doesn’t have to be overwhelming. By understanding risk, return, and volatility, you can make informed choices that align with your financial goals and comfort level.

This is where a financial adviser can help. By assessing your goals, financial situation, and emotional tolerance for risk, they can guide you towards an investment strategy that gives you the best chance of achieving your long-term objectives while staying within your comfort zone.

A strong financial plan provides the framework for your investment decisions, ensuring that every step you take is deliberate, considered, and aligned with what truly matters to you.

Remember: investing is a journey, not a sprint. Taking a measured, thoughtful approach will help you stay on track and avoid unnecessary surprises along the way.

If you’re unsure about your risk tolerance or how to structure your investments, now is the time to start the conversation.

A financial plan tailored to your needs can help you make confident, informed decisions—ensuring your investments work for you, not the other way around.

Ready to create your plan? Get in touch today and start investing with confidence.

Get in touch with me here or book directly onto my calendar here.

Willow Tree Financial Services are a Financial Adviser firm based in Polegate, East Sussex, UK. We specialise in Financial Planning, Mortgages, Investments & Pension Planning, Protection & Insurance Wills, Trusts & Estate Planning.

Will writing is not part of the Quilter Financial Planning offering and is offered in our own right. Quilter Financial Planning accept no responsibility for this aspect of our business.

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The value of pensions and investments and the income they produce can fall as well as rise. You may get back less than you invested.

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