Essentially, all investments carry some form of risk although some investments, like money market funds, significantly reduce your exposure to it. For example, stock funds carry a higher risk of principal loss, while bond funds are accompanied by interest rate risk, which is the risk that interest rate changes will affect the value of your investment.
Even investing very
conservatively has its risk: the risk that inflation may rise faster than
your investment returns, which means you lose purchasing power just when
you need it most. There's also the risk that you've invested too conservatively
to meet your goals.
In any case, it's important to assess your feelings about risk. Just how comfortable are you with the idea that you could lose investment dollars? Would you be comfortable with an investment that may lose money from time to time, if it offers the potential for higher returns than a bank deposit or money market fund? Going one step further, would you be comfortable with an investment even if it lost 10% of its value over the course of a year?
To help you decide, you should also factor in your current financial situation, and ask yourself these questions:
Below you'll see a broad ranking of the major investment categories and their levels of risk and reward. This is just a general reference tool; even within these categories, there are varying levels of risk and reward.
mutual funds that invest primarily in any one of these types of securities
will have risk and reward characteristics similar to that security type.
Although investing can be profitable over the long term, you should know that it can involve a considerable amount of risk. Unlike bank deposits, mutual funds are not insured or guaranteed by the U.S. government or any other financial institution. In other words, you could lose some or all of the money that you invest.