Money & markets · 6

Funds, risk & interest rates

You now know stocks, bonds and gold. This lesson ties them together: how ordinary people own hundreds of companies at once, why higher return always comes with higher risk, and how interest rates set by central banks move every price in this course.

👴 In one sentence Don't put all your eggs in one basket, and never expect a high return without a matching risk.

Funds: owning many companies at once

Type	How it works	Typical cost
Mutual fund (active)	A manager picks stocks or bonds, trying to beat the market	Often 1–2% a year
Index fund	Simply holds everything in an index, such as the S&P 500	Often 0.05–0.3% a year
ETF (exchange-traded fund)	A fund (usually an index fund) whose units trade on the stock exchange like a share. The first US ETF tracking the S&P 500 launched in 1993	Often 0.05–0.5% a year
Pension funds	Long-term savings for retirement; in Romania, "Pillar II" private pension funds invest part of each employee's contributions	Regulated fees

💡 Why fees matter so much 10,000 growing at 7% a year for 30 years becomes about 76,000. At 5% (the same investment with 2% of fees) it becomes about 43,000. The fee took almost half of the result. Check it in the compound interest calculator.

Diversification

If you own one company and it fails, you lose everything. If you own 500 companies and one fails, you lose 0.2%. Spreading money across many companies, industries, countries and kinds of assets is diversification, often called the only free lunch in finance: it reduces risk without necessarily reducing expected return.

The risk–return ladder

Long-run historical averages for the US, roughly 1926 to today (they vary by country and period, and the future can be different):

Average yearly return, before inflation approximate, long-run US history

Inflation≈ 3%

The return you need just to keep your purchasing power.

Cash / short-term government bills≈ 3%

Very safe, but barely beats inflation over time.

Long-term government bonds≈ 5%

More return, but prices fall when interest rates rise.

Large-company stocks≈ 10%

The highest long-run return here, with falls of 30–50% along the way.

Riskier assets (small companies, emerging markets, cryptocurrencies) can rise faster but can also fall much further, and some never recover.

Interest rates: the price of money

Central banks — the US Federal Reserve, the European Central Bank, Banca Națională a României — set a short-term policy interest rate. They raise it to cool inflation and lower it to support the economy. Almost everything else follows:

When rates rise…	Why
Savings accounts and new bonds pay more	Banks and borrowers must offer more to attract money
Existing bond prices fall	Their fixed coupons look less attractive (bonds lesson)
Mortgages and loans cost more	Variable-rate loans follow reference rates (e.g. IRCC/ROBOR in Romania, Euribor in the eurozone)
Share prices often fall, especially of fast-growing companies	Future profits are discounted at a higher rate (DCF lesson)

In 2022–2023 most central banks raised rates at the fastest pace in decades to fight the inflation that followed the pandemic and the energy crisis — and you could see all four effects above.

✏️ Check yourself: An ETF charges 0.1% a year and an active fund 1.8%. Both earn 7% before fees for 25 years. Roughly how much more does 10,000 grow to in the ETF?

Show the answer

At 6.9%: about 53,000. At 5.2%: about 35,500. The ETF ends up with roughly 17,500 more, just from lower fees.