3 Things You Should Know About Risk & Return in Investing

3 Things You Should Know About Risk & Return in Investing

Risk & Return

Risk is the potential for an investment to lose value. Return is the change in value on an investment. Understanding the relationship between risk and return is very important as you develop your investment strategy.

1. Investment Risk

Investing always involves risk. There are no guarantees that an investment will grow in value. Some people are comfortable taking on the risk of frequent ups and downs of the market in return for potentially greater long-term returns. Others prefer the slower, less volatile return of lower risk investments.

2. Different Investment Options Have Varying Levels of Risk & Return

Different asset classes come with varying levels of risk and return. That idea is broken down even further when looking at the sub-asset classes within those asset classes.

For example:

• The Large-Cap (invested in large, established companies), Mid-Cap (invested in medium sized companies) and Small-Cap (invested in small or startup companies) sub-asset classes relate to the size of the institution in which the fund is investing.
• The Value, Growth and Blend sub-asset classes refer to the mathematically calculated value of the fund in relation to certain other factors, such as earnings and dividends.
• There are also specialty stocks, such as Real Estate and International stocks.

3. Inflation Risk

It is important to watch how much investment risk your portfolio is taking on. However, focusing only on investment risk can leave you exposed to another, less talked-about risk: the risk that inflation can erode your account.

Inflation simply means that with each passing year, the same amount of money buys less. Inflation risk refers to the risk that inflation will undermine the performance of your investment. With inflation risk, if your money doesn’t earn at least enough to stay ahead of inflation, you are actually falling behind. Your dollars are losing value over time — even if you are invested in something you consider less risky.

Use our Asset Allocation Calculator to find an investment mix that has a suitable level of risk and return for you.

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