This article is general information, not a recommendation to buy or sell anything. Academy articles are prepared by the ETTFOS team and other writers. They make no claim of expertise or accuracy, and they are not kept up to date after they are published.
Table of Contents
People invest in the hope that money set aside today will be worth more later. That hope is not a promise. In the words of the US Securities and Exchange Commission (SEC): “All investments involve taking on risk.”
Three ideas are often used to sell investing: compounding, diversification and inflation. Each is real, and each has limits that tend to get left out.
Compounding
With compound interest, the SEC says, “you earn interest on the money you save and on the interest that money earns.” The same idea applies whenever earnings stay invested: each period starts from a larger base, so growth can build on growth.
What it can do
It can make time matter. While returns are positive, money left invested for longer has more periods in which to build.
What it cannot do
It cannot create a return. Compounding is arithmetic: it says nothing about what an investment will earn. Stocks can fall, and the SEC says large company stocks as a group have lost money on average about one out of every three years. A loss makes the base smaller, and the next period starts from there.
Diversification
Diversification is the practice of spreading money among different investments to reduce risk. The SEC’s description is careful: it involves spreading money “in the hope that if one investment loses money, the other investments will more than make up for those losses.”
What it can do
It can reduce one kind of risk. Ontario’s securities regulator says that if you invest in just one type of asset, your entire investment is tied to the performance of that single asset.
What it cannot do
It cannot remove risk. “You can’t eliminate risk from your portfolio,” the same regulator says, and diversification becomes less effective in extreme market conditions: when a market crash happens, “the prices of most investments drop.” The figures below show what that can look like.
Inflation
Inflation is a rise in the cost of goods and services over a set period of time, which means a dollar can buy fewer goods over time. In the United States, the Bureau of Labor Statistics reports that its all items consumer price index increased 3.7 percent in the 12 months to September 2026, before seasonal adjustment.
What it can do
It can erode what money buys. Ontario’s securities regulator describes inflation risk as the risk of a loss in your purchasing power because the value of your investments does not keep up with inflation.
What it cannot do
It cannot, by itself, make an investment a good idea or a safer one. The same regulator says you can lose money on a bond if you sell it before the maturity date for less than you paid or if the issuer defaults, and that the value of a stock can go up or down. Assets often called a hedge are no certainty either: Chicago Fed researchers found support for gold as an inflation hedge in two of their three tests.
What real falls have looked like
These are falls in one widely followed stock index. They are history, not a forecast.
- 2000–02: the S&P 500 fell 49%.
- 2007–09: the S&P 500 fell 57%.
- 2020: the S&P 500 fell 34% in 33 days.
- 2022: the S&P 500 fell 25%.
S&P 500, peak to trough, closing prices.
Source: Yardeni Research, S&P 500 Bear Markets Since 1928, 28 October 2022.
Past results are not indicative of future results.
Investing and trading are different jobs
An investor usually holds assets for what they may earn or become worth over time. A trader plans and manages individual positions, each with its own entry, exit and risk.
ETTFOS teaches a structured, rules-based approach to trading.
ETTFOS is not an investment advisory service or a broker-dealer, and it does not tell anyone what to buy or sell.
Your results will depend on your own decisions, your capital and market conditions, and you can lose money.
