Understanding Market Risk

Just like people, the stock market has its ups and downs. This fluctuation in the market is known as volatility, and the risk associated with volatility is known as market risk.  If you’re investing your hard-earned money, it’s important to understand the risk and determine how much you can tolerate.

What to look for

A long-term investment strategy can help you better weather periodic dips in the market. The more time you have before you need your money, the more risk you may be able to assume in your investment portfolio. Understanding how much time you have to give your investments the opportunity to grow and the amount of risk you are comfortable with is key to making your investments work best for you. All investing involves market risk, including possible loss of principal.

Market risk and rate of return

Another aspect of market risk is its relationship to your rate of return. Investments with a higher degree of risk (many stocks and mutual funds) may experience a higher return over the long term than investments with lower volatility (CDs or money market funds).

Before you invest, it’s important to understand how much volatility you can accept. If you have a low tolerance for market risk, you may want to invest in safer investments that will provide a more stable but lower return. If you have a high tolerance for risk and a long-term investment strategy, you may want to explore investments with higher volatility but the potential for higher returns.

A word about money market funds: These funds are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other federal government agency. Although they seek to preserve the value of your investment at $1.00 per share, it’s possible to lose money by investing in money market funds.