Understanding Investment Risk and Return

Risk and return are linked concepts in investing. Investors generally expect the possibility of higher returns as compensation for accepting greater uncertainty or potential loss, but taking more risk never guarantees a better result.

What investment risk means

Investment risk includes the possibility that an investment will lose value, fail to produce the expected income, or fail to keep pace with a financial goal. Risk can appear as short-term volatility or as a permanent loss of capital.

Different investments carry different risks

Stocks can face company and market risk. Bonds can face interest-rate, inflation and credit risk. International investments can add currency and geopolitical risks. Concentrated or complex investments may introduce additional risks.

Time horizon changes the conversation

Money needed soon generally has less time to recover from a major market decline. A longer time horizon may allow an investor to tolerate more volatility, but time alone does not eliminate investment risk.

Know your risk tolerance

Risk tolerance reflects both your financial ability and your emotional willingness to accept losses or market swings. A portfolio that causes an investor to abandon a plan during ordinary volatility may be taking more risk than that investor can comfortably sustain.

Managing rather than eliminating risk

Diversification, asset allocation, understanding what you own, controlling costs and avoiding excessive concentration can help manage risk. No strategy can guarantee against losses.

Educational note: This article is for general educational purposes and does not provide individualized investment, tax, or legal advice. Investing involves risk, including possible loss of principal.