Risk: understanding what you can lose
Risk is the possibility that the outcome will be different from expected, including loss.
Investments with higher potential returns often carry higher risk. Money held without change in the number of shekels is also exposed to erosion of purchasing power. It is important to understand when you will need the money and how much uncertainty you can bear.
Money for a trip in a week serves a different purpose than money for a distant goal.
Describe a near-term goal and a distant goal and think about why time matters.
Investor.gov · Risk and Return ↗Check your understanding
A promise of high returns with no risk sounds...
- Always attractive
- A reason to stop and check
- Like a law of nature
Answer and explanation
A reason to stop and check. High returns without risk is a suspicious promise.
What is important to find out before investing?
- Only what rose yesterday
- When you need the money and what the risk is
- How many friends bought it
Answer and explanation
When you need the money and what the risk is. Time horizon and risk are central to understanding the decision.
Continue learning
Why do prices change? — A market price is formed at the meeting point between buyers and sellers.
Diversification: more than one basket — Diversification is splitting investments among different assets and sectors.
What is a fund and what is an index? — A fund pools investors’ money and invests it according to a defined policy.