If you only understand one thing about investing, make sure it is the following — return and risk are joined at the hip. In other words, you cannot generate higher expected portfolio returns without taking on higher expected risk.

Unfortunately, during good market periods, investors focus only on the big returns they are achieving and not the risk they are assuming to make those returns.

The concept of risk and return has been brought into the spotlight recently due to the well-publicized problems that are occurring at certain money management firms and hedge funds. After posting outsized returns in the last few years, these funds blew up as their exotic - and potentially risky - strategies failed as a result of the upheaval in global financial markets.

I always find fascinating the reactions of market participants who are burned by such disasters. "I never see the problems coming" is the usual lament. Of course, when these same investors were earning 50% or 60% on their money - during a time when the market's return was about half that — it never crossed their minds that perhaps their inflated returns were due to assuming a high level of risk. And that this risk could eventually come back to bite them.

There are no free lunches in the market. If the market's return is, say, 10%, and your mutual fund or hedge fund investment is producing a return that is more than double or triple the market return, don't chalk up the out performance merely to luck or skill. Chances are your fund manager is assuming a higher level of risk to achieve those big returns.

Bottom line: Don't be seduced by big one- or two-year returns. Know how your money is being invested and what risk levels you are assuming. Indeed, it is as important to know why you are making money - and the risk you're taking to do so — as it is to know why you are losing money.