When it comes to investing, there’s a direct relationship between risk and return. That is, in general, as the potential for return increases, so does the level of risk. Or stated another way, the less risk an investment has, the lower the potential for return. So, for example, putting your money into a bank CD may have little risk, but it also offers less potential for return than purchasing common stock.
|"The less risk an investment has, the lower the potential for return."|
This is true for investment portfolios as well as for individual investments. The more aggressive you are as an investor, the more risk you may be willing to take--more risk means a greater potential return, but also a greater chance of loss. Conversely, the more conservative you are as an investor, the less risk you’re generally comfortable with--less risk means lower potential returns, but less likelihood of loss as well. This is known as the risk-return trade off.
As much as we would like it, we can’t have it all. There is a relationship between growth, income, and the stability of our investments, and when we move closer to one, we automatically move away from another. This is a dilemma that all investors face. The key is to try to maximize returns at a level of risk that you’re comfortable with.
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