Risk is the possibility that an investment you make won’t grow in value, or won’t grow as much as you’d like it to. A key element of successful investing is balancing risk and reward.
There are many factors or types of risks that can affect an investment:
- Market risk
- Company risk
- Foreign investment risks
- Interest-rate risk
- Credit risk
- Illiquid security risk
- Prepayment risk
- Extension risk
The risk most investors are most familiar with is market risk, or the possibility that the market will shift and you’ll lose money. Inflation is another common risk. As an example, if inflation is 3% and your return is 3%, your "real or inflation-adjusted return" is 0%.
Also important is your willingness to live with risk:
- Will you be able to psychologically tolerate the potential ups and downs of your investment mix?
- Will you be financially able to weather the potential fluctuations of market volatility?
For some understanding of your own risk tolerance, use the Investment Mix Tool.