Chapter 6. No Investment Is Risk-Free

It's a Dangerous World—Even for Those Hiding out in Savings Accounts

Now that you're a committed saver, you have to figure out where to stash those monthly savings. Should you go for stocks, with their promise of high returns, or maybe favor certificates of deposit, with their comforting reputation for safety?

Start with this brutal truth: No investment is free of all risk.

Investments can usually be slotted into one of four categories—stocks, bonds, cash investments, and hard assets. How much you invest in each will depend on your goals, your time horizon, and your stomach for risk. This notion of risk, however, can be a tricky one. At times, each of the four may seem like the low-risk option. But don't be lulled into complacency. In the right circumstances, all four can go badly wrong. The good news: All four probably won't go wrong at the same time.

Sharing the Pain

The four categories of investment are, of course, quite different. Stocks allow you to become part owners of publicly traded corporations, and you should benefit as dividends are paid and rising earnings drive share prices higher. Meanwhile, when you buy bonds and cash investments, you become a lender and earn interest in return for the use of your money. Cash investments like savings accounts and money market funds shouldn't fluctuate in value, while bonds will rise and fall in price as interest rates change. Finally, hard assets encompass a grab bag of investments, including real ...

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