Just because you take investment risks doesnt mean

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Just because you take investment risks doesn't mean you can't exert some control over what happens to the money you invest. In fact, the opposite is true. If you know the types of risks you might face, make choices about those you are willing to take,
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and understand how to build and balance your portfolio to offset potential problems, you are managing investment risk to your advantage. Why Take Risks? The question you might have at this point is, "Why would I want to risk losing some or all of my money?" In fact, you might not want to put money at risk that you expect to need in the short term—to make the down payment on a home, for example, or pay a tuition bill for next semester, or cover emergency expenses. By taking certain risks with the rest of your money, however, you may earn dividends or interest. In addition, the value of the assets you purchase may increase over the long term. If you prefer to avoid risk and put your money in an FDIC-insured certificate of deposit (CD) at your bank, the most you can earn is the interest that the bank is paying. This may be good enough in some years, say, when interest rates are high or when other investments are falling. But on average, and over the long haul, stocks and bonds tend to grow more rapidly, which would make it easier or even possible to reach your savings goals. That's because avoiding investment risk entirely provides no protection against inflation, which decreases the value of your savings over time. On the other hand, if you concentrate on only the riskiest investments, it's entirely possible, even likely, that you will lose money. For many people, it's best to manage risk by building a diversified portfolio that holds several different types of investments. This approach provides the reasonable expectation that at least some of the investments will increase in value over a period of time. So even if the return on other investments is disappointing, your overall results may be positive. Types of Investment Risk There are many different types of investment risk. The two general types of risk are: Losing money, which you can identify as investment risk Losing buying power, which is inflation risk It probably comes as no surprise that there are several different ways you might lose money on an investment. To manage these risks, you need to know what they are. Most investment risk is described as either systematic or nonsystematic. While those terms seem intimidating, what they refer to is actually straightforward.
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Systematic Risk Systematic risk is also known as market risk and relates to factors that affect the overall economy or securities markets. Systematic risk affects all companies, regardless of the company's financial condition, management, or capital structure, and, depending on the investment, can involve international as well as domestic factors. Here are some of the most common systematic risks: Interest-rate risk describes the risk that the value of a security will go down because of changes in interest rates. For example, when interest rates overall increase, bond issuers must offer higher coupon rates on new bonds in order to attract investors. The consequence is that the
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