Investing: the basics — risk, return, allocation

🧔 Adult The EU/OECD framework expects you to tell saving from investing, debt from ownership (you lend money against a promise of repayment and interest, or you buy a share and split profit and loss), and to know that the value of an investment can go up or down.

The order in Pecuvo is clear: first an emergency fund (Module 8) and liquidity for near-term needs; only then money you can leave for a long time. Money you will need in a few months is not money for investing, because the period is too short to wait for a recovery after a fall. The framework also says that the choice between saving and investing depends on the time to the goal (167).

Myth → truth

• Myth: "Investing is for the rich, saving is for everyone else."
• Truth: these are two tools for different time frames and goals. Both are useful; the order is: emergency fund → goal → time frame → instrument.

Who profits? Nobody profits from the word "investment" on its own: everything depends on the product, the time frame and the costs (Chapter 6). Be careful with adverts that call ordinary saving "investment", and the other way round.

→ Continue at the source: EU/OECD-INFE, Financial competence framework for adults in the European Union (2022), topic 2.4 (competences 176–232) — https://finance.ec.europa.eu/publications/commission-and-oecd-infe-publish-joint-framework-adults-improve-individuals-financial-skills_en ✔

🧔 Adult The EU/OECD framework stresses that a higher expected or required return is usually linked to higher risk. This is not a law that guarantees a reward: risk you take on may be rewarded, but it may not. Therefore:

• Realised and unrealised loss (183): if the price has fallen but you haven't sold, the loss is "on paper"; selling makes it real.
• The asymmetry of loss — example (fictional): an investment of €1,000 falls by 50% and becomes €500. To get back to €1,000 it has to grow by 100%, not 50%. A 20% loss needs 25% growth to recover. Formula: required growth = 1 / (1 − loss) − 1.
• Risk tolerance (185) has two parts: how much risk you want to take and how much risk you can bear (income, emergency fund, time frame, obligations). The second matters more than the first.
• The framework also speaks of the additional risk of uninformed decisions (184) and of the confidence not to invest in a product you do not understand (188).

Myth → truth

• Myth: "Risk is the same thing as loss."
• Truth: risk is a spread of possible outcomes; loss is one of them.
• Myth: "High return without risk exists — you just have to find it."
• Truth: a promise of high return with low or zero loss is a signal to ask more questions (Module 17, Module 5).

Who profits? Whoever sells "a safe, big return" profits from your trust, not from the market. Ask: where does this return come from, and who carries the risk?

→ Continue at the source: EU/OECD-INFE (2022), topic "Risk basics" (354–358) and 2.4 "Investing" ✔; ESMA — https://www.esma.europa.eu ✔

🧔 Adult Inflation and real return. The nominal return is the one written down. The real return is what remains after inflation:

Real return ≈ (1 + nominal) / (1 + inflation) − 1

Example (fictional): nominal 5%, inflation 3% → (1.05 / 1.03) − 1 ≈ 1.9%, not 2%. The framework expects you to understand how changes in inflation, interest rates and exchange rates affect your long-term plans (182). The framework also expects you to be able to calculate the relative increase or decrease in the value of an investment (186). Formula: (new − old) / old × 100. The framework also notes that the price of the same share or fund is different at different times (189) — you buy and sell at different prices. Time does not remove risk, but it lengthens the period over which short-term swings can even out — in markets that do eventually recover; this is no guarantee for any single market.

Myth → truth

• Myth: "Compound interest makes anyone who starts early rich."
• Truth: it only works if the return is positive after fees and inflation and if the time frame is long. The same 6% with no fees and with 3% in fees gives very different results (Chapter 6).

Who profits? Whoever is on the right side of interest: the lender with debt, the investor with a long time frame and low fees. Not the person paying interest on interest.

→ Continue at the source: Module 7; OECD/INFE, Toolkit for measuring financial literacy and financial inclusion (2022) — https://www.oecd.org/en/publications/oecd-infe-toolkit-for-measuring-financial-literacy-and-financial-inclusion-2022_cbc4114f-en.html ✔ (opened 21.10.2026).

🧔 Adult The idea comes from Harry Markowitz, "Portfolio Selection", The Journal of Finance, vol. 7, no. 1 (March 1952), pp. 77–91 ✔ (Crossref, DOI 10.1111/j.1540-6261.1952.tb01525.x). The core thought: the risk of the whole portfolio depends not only on the risk of each holding on its own, but also on how the holdings move relative to one another (correlation). Holdings that do not move in the same way can lower overall volatility for the same expected level of return. That is why the combination matters more than picking one "best" thing.

The EU/OECD framework expects you to understand the benefits of a diversified portfolio (194) and why overall asset allocation matters (195). It also expects the skill to compare the composition of pension funds, life insurance policies and collective schemes (207), in order to judge their suitability as a whole.

There is no "perfect allocation". What fits depends on the goal, time frame, income, emergency fund, family and how much fluctuation you can bear (199). That is why Pecuvo gives no percentages like "60/40". It gives questions:

1. What is this money for, and when will I need it?
2. How big a fall can I bear without selling in panic?
3. How many different things support me — or does everything depend on one company, one market, one employer?
4. What do I already have outside my portfolio (job, property, pension) that carries risk together with it?

Myth → truth

• Myth: "Diversification means buying lots of things."
• Truth: lots of things that fall together are not diversification. What matters is how differently they behave, not how many there are.
• Myth: "There is an allocation that is always best."
• Truth: there isn't; the best one is only known years later, looking back.

Who profits? Whoever sells complex "packaged" sets with more transactions (Chapter 6): more parts often mean more fees. Keeping a clear and simple picture is your protection.

→ Continue at the source: Markowitz, H. (1952), Portfolio Selection, The Journal of Finance 7(1): 77–91, DOI 10.1111/j.1540-6261.1952.tb01525.x ✔; EU/OECD-INFE (2022), 2.4 "Choosing and diversifying investments" (✔ the numbers).

🧔 Adult UCITS (Undertakings for Collective Investment in Transferable Securities) is the European framework for collective schemes open to a wide range of investors — Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 ✔. It governs authorisation, the management company, the depositary, and rules on investing and on disclosure. It does not remove risk: a UCITS fund can lose value.

The EU/OECD framework wants you to know the characteristics of different products — risk, liquidity, expected return and sustainability — or to know how to find them (190), and to be aware that the price of the same product differs between providers and channels (192), and also that different brokers and platforms exist (196). The skill of combining pensions, life insurance and collective schemes as the case requires is 203. Gold and other commodities (228) are items of value whose price is moved by many factors and which produce no income by themselves (Module 3). Crypto-assets: Module 5 (211–212).

Questions for any product (standard list):

1. What exactly am I buying — debt, a share, or something derivative?
2. Where would any return come from?
3. What are the risks (by the types in Chapter 2)?
4. How quickly can I get out, and at what price?
5. How much does it cost — once and every year?
6. Who holds my money, and what happens if the intermediary goes bankrupt (Chapter 7)?

Myth → truth

• Myth: "A fund means safe, because it's spread over many places."
• Truth: funds can carry very different risk — from very low to very high. Read the document (Chapter 6).
• Myth: "A bond is risk-free because it pays money back."
• Truth: it carries credit risk, price risk before maturity and inflation risk.

Who profits? The issuer — from the capital. The manager and the intermediary — from the fees. You — if the asset's income exceeds the fees, inflation and taxes over your time frame.

→ Continue at the source: Directive 2009/65/EC (UCITS) — https://eur-lex.europa.eu/eli/dir/2009/65/oj ✔; Bulgaria's Financial Supervision Commission (the authority supervising funds and intermediaries there) — https://www.fsc.bg ✔

🧔 Adult Formula for the effect of the fee:

Value after n years ≈ Starting amount × (1 + gross return − fee)^n

Example (fictional): €10,000 invested, gross return 4% a year, 30 years, no other changes.

• With a total annual fee of 0.2%: net 3.8% → 10,000 × 1.038^30 ≈ €30,600.
• With a total annual fee of 2%: net 2.0% → 10,000 × 1.02^30 ≈ €18,100. The difference (≈ €12,500) comes only from the fee, repeated for 30 years. The numbers are fictional, to show the principle; real ones depend on the specific product.

Key information document (KID). Under Regulation (EU) No 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs) ✔ (checked on EUR-Lex):

• the product's manufacturer draws up a key information document for products offered to retail investors; the person selling or advising provides it before the transaction is concluded ✔ (Art. 13);
• the document is short — at most three sides of A4 ✔ (Art. 6(4)), with a common layout so that products can be compared;
• it contains: the type of product, a summary risk indicator (a scale from 1 to 7 ✔ — Delegated Regulation (EU) 2017/653), possible performance scenarios, the costs and the recommended holding period ✔, and how and where to complain;
• when the product is not simple and may be difficult to understand, the document must contain a comprehension alert: "You are about to purchase a product that is not simple and may be difficult to understand." ✔ (Art. 8(3)(b); English wording checked against the official English text, CELEX 32014R1286, on 21.10.2026).
• From 01.01.2023, the PRIIPs KID replaces the "Key Investor Information" document (KIID) for UCITS funds ✔ (the transition was extended to 31.12.2022 by Regulation (EU) 2021/2259).

How to read a KID — six questions:

1. What is the category of the product?
2. What is the risk indicator, and what lies behind it (Chapter 2)?
3. What happens in the unfavourable scenario? (Scenarios are models, not promises.)
4. What is the recommended holding period? If I leave earlier — what are the costs?
5. What is the total annual cost, and what is the one-off cost?
6. Is there a guarantee? From whom, and up to how much?

Myth → truth

• Myth: "A low fee is a minor detail."
• Truth: the fee is the only result known in advance. The return is not.
• Myth: "The cheapest product is the best."
• Truth: price is only one criterion — risk, liquidity and suitability for the goal matter too (197).

Who profits? Everyone who takes a share of your money: manager, intermediary, platform. That is a normal price for a service; the question is whether you know it and whether the service is worth it.

→ Continue at the source: Regulation (EU) No 1286/2014 — https://eur-lex.europa.eu/eli/reg/2014/1286/oj ✔; the Joint Committee of the European Supervisory Authorities (EBA, EIOPA, ESMA) — questions and answers on the KID (first set 04.07.2017, updated over time): https://www.esma.europa.eu/press-news/esma-news/european-supervisory-authorities-publish-qa-key-information-document-kid ✔ (opened 21.10.2026).

🧔 Adult 1. MiFID II — Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments ✔ (checked on EUR-Lex). Its main ideas, transposed into each member state's national law:

• Suitability assessment: when giving investment advice or managing a portfolio, the firm collects information about your knowledge, experience, financial situation, objectives and risk tolerance, and recommends only what is suitable for you ✔ (Art. 25(2)). That is why the framework says you should be ready to provide personal information for this assessment (209).
• Appropriateness assessment — when the firm does not advise you but only executes your order, it asks about your knowledge and experience with that product and, if the product is not appropriate, warns you ✔ (Art. 25(3)). For non-complex instruments (e.g. shares and ordinary bonds traded on a regulated market, units in UCITS) this check can be skipped, but only if the service is at the client's initiative and the client is clearly warned that no assessment will be made ✔ (Art. 25(4), opened 21.10.2026).
• Fair, clear and not misleading information, including about costs and risks ✔ (Art. 24(3)).
• The firm must keep clients' money and instruments separate from its own and safeguard their rights in case of insolvency ✔ (Art. 16(8)–(9)).

Example: Bulgaria — MiFID II is transposed by the Markets in Financial Instruments Act; the Public Offering of Securities Act also applies — https://www.lex.bg ⚠ (not opened).

2. Licence and supervision. Investment firms, management companies and pension companies operate under a licence from the national financial supervisor (for banks — the relevant banking supervisor); registers of licensed firms are public. Before giving money to an intermediary, check in the register that it is licensed for that activity. A licence does not guarantee a profit.

Example: Bulgaria — the registers are on the FSC website, fsc.bg ✔

3. Investor compensation scheme. Directive 97/9/EC on investor-compensation schemes requires every member state to have such a scheme. It covers clients' claims when an investment firm is unable to return their money or instruments; it does not cover losses from a fall in price. The minimum level under the directive is ECU 20,000 (today euro) per investor ✔ (Art. 4(1)); countries may set a higher level.

Example: Bulgaria — Bulgaria's Investor Compensation Fund pays 90% of the claim, but no more than 40,000 leva (≈ €20,452) ✔ (https://sfund-bg.com, 19.10.2026). The fund's website still states the amount only in leva ✔ (https://sfund-bg.com, opened 21.10.2026); the amount in euro is a conversion at the fixed rate of 1.95583.

Check in your country — which body runs your national investor compensation scheme, what share of a claim it pays and up to what limit. Your national financial supervisor's website usually links to it.

4. Warning signs (framework 206, Module 17): a guaranteed high return, pressure to decide quickly, no licence, being unable to withdraw your money, a product you do not understand — then the framework's rule applies: do not invest in what you do not understand (188).

Myth → truth

• Myth: "If it's registered, it's guaranteed."
• Truth: supervision checks rules, not results. Losses from the market are not compensated.
• Myth: "The compensation scheme gives me back any loss."
• Truth: it covers only certain cases of an intermediary's insolvency, and only up to a set limit.

Who profits? Protection works best when both sides use it: the intermediary follows the rules, and you ask questions and read the documents.

→ Continue at the source: Directive 2014/65/EU — https://eur-lex.europa.eu/eli/dir/2014/65/oj ✔; Directive 97/9/EC — https://eur-lex.europa.eu/eli/dir/1997/9/oj ✔. Example: Bulgaria — FSC — https://www.fsc.bg ✔; Investor Compensation Fund — https://sfund-bg.com ✔; Markets in Financial Instruments Act and Public Offering of Securities Act — https://www.lex.bg ⚠ (not opened).

🧔 Adult Other described biases: loss aversion (a loss weighs more than a gain of the same size), anchoring (you stick to the first price you saw), confirmation (you look only for information that supports a decision already made). The framework also speaks of the risk of "social trading" — copying other people's trades (231). What helps (232) — with no promise that it removes the problem:

1. A written plan before buying: goal, time frame, what would make me change the decision.
2. A waiting rule: I don't decide on a day when I'm excited or scared.
3. Separating the decision from the news: I open the portfolio on a schedule, not at every headline.
4. Ask "what do I know, and what am I only assuming?"
5. An emergency fund (Module 8) — it reduces the pressure to sell at a bad moment.

Myth → truth

• Myth: "A good investor is not affected by emotions."
• Truth: everyone is. Good practice is to build rules that limit the harm emotions can do.
• Myth: "Everyone is buying — so it's safe."
• Truth: a crowd is not proof of value; it is often proof of excitement (Module 17).

Who profits? Whoever profits from frequent trading and from noise. The more trades you make under pressure, the more fees you pay (Chapter 6).

→ Continue at the source: EU/OECD-INFE (2022), 2.4 "Factors influencing investment decisions" (✔ the numbers); Module 14.

🧔 Adult The EU/OECD framework distinguishes two strategies (221): divestment — you avoid certain sectors or companies; and engagement — you use your rights as a shareholder to influence the company. The skill is to ask how the product takes these criteria into account (227) and to compare (225), without trusting a label alone — the framework mentions caution about "greenwashing". A sustainable choice is a matter of preference; it is no guarantee of a higher or lower return.

"Active or passive". An active fund tries to beat a given index by selecting assets; a passive fund follows the index with fewer decisions and usually a lower fee. Studies comparing the two approaches include, for example, the SPIVA series by S&P Dow Jones Indices, which compares active funds with their benchmark indices over different periods. Scope, methodology and categories determine every result: the figures differ by market, period and whether they are fund-weighted or asset-weighted. For example, the latest report for Europe (SPIVA Europe Mid-Year 2026, 13.10.2026) states that by the end of June 2026 94% of actively managed equity funds domiciled in Europe and 76% of bond funds had underperformed their benchmarks over 10 years; over 6 months the shares were 65% and 63% ✔ (S&P Dow Jones Indices — https://www.spglobal.com/spdji/en/spiva/article/spiva-europe/, opened 21.10.2026). The share varies greatly by category and market. The main conclusion holds regardless of the figure: the reports are historical and do not predict the future; and fees are a known part of the difference (Chapter 6).

Myth → truth

• Myth: "Passive is always better (or worse) than active."
• Truth: it depends on the period, the market, the fees and the specific fund; past performance does not guarantee future results.
• Myth: "A green label means the product is sustainable."
• Truth: a label is a claim; compare the criteria and ask how they are measured.

Who profits? Whoever sells a label without substance, and whoever sells high fees with a promise of "beating the market". You profit when you understand what you are buying and why.

→ Continue at the source: S&P Dow Jones Indices, SPIVA — https://www.spglobal.com/spdji/en/spiva/ ✔ (opened 21.10.2026); EU/OECD-INFE (2022), "Sustainable investing" (219–227, ✔ the numbers); Module 29.

🧔 Adult

1. Nominal return 5%, inflation 3%. Roughly what is the real return?
2. An investment falls by 20%. By how much must it grow to get back to its starting value?
3. What does an investor compensation scheme cover and not cover, and what do you check in the KID before buying?

Answers: (A) 1: ≈ 1.9%; 2: 25%; 3: it covers an intermediary being unable to return money/instruments, not market losses; in the KID — category, risk indicator, scenarios, holding period, costs, guarantees.