Understanding risk

If you want the financial security and sense of accomplishment that comes with investing successfully, you have to be willing to take some risk. In most cases, risk means the possibility you'll lose some or even all of the money you invest.

Taking risk doesn't mean you have to take flying leaps into untested waters — it means anticipating what the potential problems with a certain investment might be, and putting a strategy in place to manage, or offset them.

There is some risk you can avoid. For instance, there's risk in concentrating all of your savings in just one or two stocks or bonds. There's investment risk in choosing to put your money into one company rather than another. And there's management risk that a company's officers may make serious errors. These are examples of what's known as nonsystemic risk because the potential problem lies in the individual investment, not the investment marketplace.

You can manage nonsystemic risk by allocating and diversifying your portfolio, or spreading your assets among a variety of investments. That way, if one of your investments goes down significantly in value, those losses may be offset to some degree by gains, or even stable values, in some of your other investments.

Being too safe
Paradoxically, one of the most common investment risks people fall prey to is not taking enough risk. If you invest very conservatively — or don't invest at all — because you fear losing some of your principal, you run the risk of not meeting your goals and even running out of money during retirement. That's because the rate of return you'll realize will be so low that your investments won't outpace inflation.

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