Managing Investment Risk - Risk and Rewards

Every investment you make has some type of risk involved. For accepting risk, you expect to be rewarded in some way.

Every investment you make has some type of risk involved. If you decide to stash your cash in your mattress, keep it in a savings account, or buy the hottest new internet stock, you are putting your money at risk. Each simply has a different kind of risk.

For accepting risk, you expect to be rewarded in some way.  The more risk, the more reward, right? But you need to each a balance with risk and reward.

The two major risks you have when investing are Loss of principal which is lose your original dollar amount invested. and Loss of purchasing power (also known as inflation risk). The risk here is that you get a return on your investment dollars, but the return isn't enough to beat the inflation rate. Your dollars are intact; they just won't buy as much as they once did.

Type of Risk

There are many risks you face when investing. Learn what the risks are before you invest, and then decide whether the reward is worth the risk.

Market Risk. The stock market fluctuates, and oftentimes there is what is known as a herd mentality: if some things are down, everything goes down.

Interest rate risk. This risk occurs when interest rates changes. If you lock in a 6 percent return on your bond and then interested rate go up to 8 percent, you are not happy. The same is true if you lock in a mortgage at 8 percent, and then rates drop to 6 percent.

Currency Risk. When you invest overseas, dollars are converted to the foreign currency and need to be converted back again. Your gain or loss is reduced or increased by the change in the currency exchange rate.