Risk Associated with Investing (1279)

There are many types of risk involved with investments. Let's consider two types: investment risk and purchasing-power risk.

Investment Risk is the probability that the actual return on an investment will be different from what you expect. This is the type of risk one usually thinks of when considering investments. For example, certificates of deposit (CDs) and EE savings bonds are considered safe investments because of the probability that the actual return on your investment will be what you expect is 100 percent. CDs are also FDIC-insured. On the other hand, stocks are considered more risky than CDs because you have no guarantee about actual return.

Of equal importance is a second type of risk associated with investments. Purchasing-Power Risk is the risk that the value of the money you invest will not keep up with inflation. In general, this risk is greatest with those investments alternatives with a set, guaranteed rate of return. So while CDs have a low investment risk, they have a high purchasing-power risk.

Keep in mind the fundamental relationship between the rate of return and the investment risk: higher rates of return and generally associated with a higher risk of losing the principal. Accepting the higher risk is the "price" you pay to achieve the potential of a higher return. Conversely, accepting a lower potential return on the investment is the "price" you pay for a more secure investment.

For more information on this subject, Please visit the College of Agricultural Sciences Publications Web site.

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