business Personal FinanceWall Street 101

Introduction | What is Risk? | Why Be Risky? | Where Does Risk Come From? | Who Can Tolerate Risk? | How To Reduce Risk | When To Avoid Risk | Timing The Market

Risk

Why should we be interested in volatile investments?

As we mentioned, you've got to accept risk if you want return. Risk is the amount of deviation from expected return so when we speak of a "riskier" investment, it is one with a higher potential deviation.

But the real issue of risk isn't so clear. Many investors ask, "What is the least risky investment?" This is somewhat like asking, "What food tastes good?" It all depends on you and what your goals are. Depending on what you want to achieve, the least risky investments in terms of short-term deviation may be the most risky in terms of meeting your needs.

Historically, stocks have consistently been the best-performing investments. There may have been years, or periods of a few years, when stocks lost money, but they have also returned more money more often than any other investment. There has been one 10-year period over which the S&P 500 has earned an annual return of more than 20%, and another 10-year period during which it lost nearly 1% per year. Bonds and T-Bills have never lost this much over a ten-year period, but they have never returned as much either.

But don't assume from this that all risky investments necessarily have the potential for great returns. Some investments are just bad investments. Be sure you're compensated for the risk you take.


The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.
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