Risk

How do we define the term risk?  There are numerous ways that have been used to explain what risk is but one thing that generally rings true, the greater the fluctuation in gains and losses the greater the investments risk.  The smaller the fluctuation, the smaller the risk.  Therefore, low-risk investments, such as savings and money market deposit accounts usually mean lower expected returns than high-risk investments such as commodities and financial futures.

Investors need to understand the relationship between the return they can expect on an investment and the amount of risk that they must take to earn that return.  In general, investors seeking higher returns must be prepared to assume higher risks or reduced liquidity.  The inability to understand this risk-return trade-off is the main reason that many investors pick the wrong investments and end up facing catastrophic results.  In the coming days we will discuss various types of risk.

 

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