Investment basics
In this chapter: Why save, why invest, financial planning fundamentals · Risk-return trade-off in everyday language
Saving and investing solve different problems. Saving preserves money for known short-term needs; investing grows it for long-term goals. The two are linked through the time horizon. Risk and return are coupled — every return above the risk-free rate carries risk. Understanding this trade-off is the foundation of all investment advice.
The savings-investment hierarchy: emergency fund (3-6 months expenses, in liquid/savings), short-term goals (1-3 years, in conservative debt or hybrid), medium-term goals (3-7 years, in balanced/hybrid), long-term goals (7+ years, in equity-tilted portfolios). Time horizon dictates risk capacity, not risk tolerance. A young investor with a 30-year horizon can afford to weather drawdowns; the same person near retirement cannot.
A nuanced point: risk capacity vs risk tolerance. Risk capacity is what your finances allow; risk tolerance is what you emotionally accept. They often differ. A young high-earner has high capacity but may have low tolerance after a 30% market drop. Good distributors counsel through this gap rather than just taking the questionnaire score at face value.