In This Chapter
Considering different types of risk
Taking steps to reduce your risk
Balancing risk against return
Investors face many risks, most of which I cover in this chapter. The simplest definition of risk for investors is "the possibility that your investment will lose some (or all) of its value." Yet you don't have to fear risk if you understand it and plan for it. You must understand the oldest equation in the world of investing — risk versus return. This equation states the following:
If you want a greater return on your money, you need to tolerate more risk. If you don't want to tolerate more risk, you must tolerate a lower rate of return.
This point about risk is best illustrated from a moment in one of my investment seminars. One of the attendees told me that he had his money in the bank but was dissatisfied with the rate of return. He lamented, "The yield on my money is pitiful! I want to put my money somewhere where it can grow." I asked him, "How about investing in common stocks? Or what about growth mutual funds? They have a solid, long-term growth track record." He responded, "Stocks? I don't want to put my money there. It's too risky!" Okay, then. If you don't want to tolerate more risk, then don't complain about earning less on your money. Risk (in all its forms) has a bearing on all your money concerns and goals. That's why it's so important that you understand risk before you invest.
This man — as well as the rest of us — needs to ...