The higher the return, the higher the risk

Don was 25 when he decided to make his savings work harder for him. He’d been working since he left school, and saved $20,000. The money was in the bank earning 6% interest, but Don was sure his life savings could earn him more than that.

He consulted the experts, researched his options and decided to buy some corporate notes. Corporate notes are where you lend money to a company and the company pays you an interest rate that is usually higher than the rate a bank would offer. In this case the corporate notes were paying 12% interest – double the bank rate.

Don didn’t think much about why the interest rate was so high. The reason was that the company needed to offer high interest to attract money, because many experts – including the company’s own bank - considered the company a risky investment. The bank was right – the business collapsed and Don only got back $2,000.

Now Don is devastated – he has lost most of his life savings. The money was all he had, and he realises now that, even if he chased high returns with a proportion of the money, he should have kept most of it in safer investment options with lower returns.