Online Investing Hacks

Are You Walking on the Wild Side?

Make sure that the investment return your portfolio is earning sufficient compensation for the risks you take.

In investing, risk and return walk hand in hand—the more risk you accept, the more return you should earn. Some investors are so afraid of losing money that they play it safe, purchasing certificates of deposit or hiding money under the mattress. Unfortunately, no investment is without risk. Even if you hide money in your mattress, it can burn in a fire with the rest of your belongings! At the other end of the spectrum, you might be willing to take big risks to grab big gains. In this case, the key is to accept risks only when the payoff justifies the potential losses. By understanding the risks you take and balancing those risks with your investment return, you can reach your financial goals without unnecessary jolts to your system.

Understanding Risk

Risk comes in many forms, and each type of investment carries its own unique combination of risks. For some investments, risk decreases the longer you own them. For others, the opposite is true. For example, over short periods of time, stocks carry a lot of risk. 1931 turned in the largest one-year loss in stocks (the market index of large-cap stocks in this example)—over 43 percent. Even over a few 10-year periods, market indexes have lost principal. However, when you evaluate stock market indexes over 20-year periods, they have never lost money. Conversely, with an FDIC-insured savings account, ...