Is there a direct relationship between risk and reward when investing?
There is a direct relationship between risk and reward. The relationship is the greater the risk, the greater the potential for gain but more importantly the greater the risk for loss. The opposite holds true as well, as the lesser the risk, the lesser the potential for gain but the lesser the risk of loss.
You should be suspicious if someone ever tries to offer you an investment with a high rate of return while claiming that the investment is low-risk or guaranteed. If it sounds too good to be true it probably is!
Every investment has risks specific to it and therefore has a corresponding risk/reward profile. What is important to understand is that low risk investments such as GICs, will generally offer a lower potential for return but offer the safety of limited risk of loss. The opposite is true for riskier investments such as equities which will offer a higher potential for return but also have a higher risk of loss.
It is important to understand that higher risk does not guarantee higher returns. We all want to achieve strong returns but this doesn’t mean that we should all invest in riskier investments. Even if a person has a high comfort level with taking risks, he or she may have a low capacity to absorb any losses that may occur as a result of riskier investing. In determining your level of risk it is important that you consider how much risk you are comfortable with as well your ability to absorb and deal with any significant losses that can result from investing in riskier investments. For example, with a high risk investment you should ask yourself, "what would happen if I lost all of or a large portion of this money?" If the answer is that there would be serious financial impact to you then you should probably consider a less risky investment. Guiding you on selecting your risk tolerance and suitable investments is something that your investment advisor can assist you with.