Risk


When it comes to your money, which is the bigger risk?
  1. Investing in the stock market when prices have been falling
  2. Putting all your money in the safe in your closet
Over time, the bigger risk is probably "Putting all your money in the safe in your closet". If you invest in the stock market when prices have been going down, you might lose money in the short term, but when stocks go up, you might make money. On the other hand, you will never make any money on the cash you put in your safe, and inflation will make that money less valuable by the time you take it out.
 
Example. Let's say you put your money in a savings account that earns 1% interest a year. If inflation is 3% that year, you are actually losing money by playing it safe, because your actual return is negative 2% (1% - 3% = -2%). If you have to pay taxes on that account, you will just dig yourself a deeper hole. Strange, but true - sometimes the "riskiest" thing you can do is play it too safe!
 
Are you someone who likes to take physical risks but won't dare take a risk investing in the stock market because you're afraid you might lose money? In truth, you are taking on more risk when you try to play it safe or do nothing with your savings.
 
Most people think of investment risk as the likelihood that an investment will DROP in price. That's a part of risk, but your money can also lose value when it's in a "safe" investment - or when it is not invested at all. That's because "safe" money - savings that seems to have little or no risk - often doesn't provide enough earnings to keep up with the rising cost of living, or inflation. That is certainly true for checking or money market accounts. Even though checking accounts are safe (because they're insured by the government), they pay little or no money in return.
 
One of the biggest risks for your retirement nest egg is that it might not earn enough to keep up with inflation. However, even if your savings earns enough to keep up with inflation, you may need to take on more investment risk to have enough retirement savings to live comfortably. Remember: some risk is necessary to achieve long-term investment growth.