Basic Principles of Investing

Why Take Any Risk?

But why take any risk at all? Why not just keep your money in CDs? Different investments offer different rates of return. When you compare the returns on common stocks, bonds and cash, common stocks have had the highest rate of return over a long period of time.

Generally, the more risk you are willing to take, the greater your potential return.

SUGGESTION: Time is also a good way to reduce risk. The longer your time horizon, the less effect interim market fluctuations may have on the ultimate value of your portfolio, and the more opportunity your money may have to grow.

The differences between minimum and maximum return diminish over the long term. If you only hold a stock for a year, it could be way up or way down. But if you hold it for ten years, the spread between the expected minimum and the expected maximum decreases substantially.

Historically, stocks have the biggest range of probable returns. That's what we mean when we say that they are volatile. But it is also stocks that may have the potential for the highest return over time. The further you are from needing to withdraw your money, the more experience you have in the financial markets, and the less you sweat market fluctuations, the more ability you have to tolerate market risk. The more ability you have to tolerate market risk, the more you should consider investing in stocks. Again the same warning, just because it has been that way in the past does not guarantee that it will be that way in the future.

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