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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: Learning to Deal With It

In the investment world, "risk" can be summarized as the fluctuation (up and down) in the return on your investment, and not the possibility that you will lose all your savings in one fell swoop. Risk is not an "either-or" proposition, with investments neatly divided into "safe" and "risky" categories. In fact, there are many levels of risk, and while some investments may be "safe" in the sense that they won't actually decline in value, no investment is 100% safe. A smart investor understands the need to undertake a certain amount of risk. If you want higher potential returns, you've got to accept a greater amount of fluctuation. In most cases, riding out these fluctuations will work for you in the long run. Investment risk rarely means total, irretrievable loss.

The amount of risk you take is a personal decision that depends to a certain extent on how strong your nerves are. Investments are by nature unpredictable, and even the best investment don't go straight up. If you take on a lot of risk, you have to be prepared to wait out slumps in your share prices.

You can't avoid risk entirely, or try to outsmart it through what you think are cleverly timed purchases and sales. But you can shape your investments to minimize risk and maximize potential return. More on that later.

For now, let's take a look at some basic questions about investment risk:

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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