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Different Types of Risk
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The greatest fear of any investor is losing money. In fact, studies have shown that investors are more concerned about a possible poor outcome than an unexpectedly good outcome. As a result, most investors are willing to give up some portion of their expected return in exchange for greater certainty of return.
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But there are many different forms of risk that an investor should consider. For instance, you're guaranteed not to lose your cash if you stuff it under your mattress (disregarding a fire or clever thief). However, you run the risk that your money won't buy as much in the future, due to inflation. You also could stick your cash in a savings account. That's the safe thing to do, but again, it might not keep up with inflation.
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Another risk is that you could have received higher returns by investing in something else. This is called opportunity risk. However, you should think of investing as a way to meet a specific goal, not as a race to get the most money you can. After all, no matter how well your investments do, something else is likely to do better.
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You need to balance these and other risks against one another. You shouldn't be so afraid of losing money that you let inflation sap your savings. But you shouldn't be so eager to get into the hottest stock that you take too big of a gamble. Going to either extreme means courting the biggest risk of all: not meeting your investment goals.
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