When it comes to investing, most people would agree that high returns are good and risk is bad.
The problem is that risk and return go hand in hand. To have the opportunity to earn superior long-term results with your mutual funds, you must be willing to accept fluctuations in your principal. You also need to determine your personal comfort level with risk. Risk tolerance varies from person to person - and your own risk tolerance may change over time.
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Common types of investment risk
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Capital risk: The risk that your capital won't be returned intact.
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Inflation risk: The risk that inflation will rise faster than your earnings, leaving you with less real purchasing power than when you purchased the investment.
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Interest-rate risk: Since bond prices fall as interest rates rise, this type of risk is a particular concern for fixed-income investors.
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Market risk: A measure of how sensitive a fund's holdings are to changes in general market conditions. Remember, though, that securities that lose value quickly in market declines may also show the strongest gains in more favorable environments.
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Reinvestment risk: The risk you won't be able to reinvest your capital at favorable rates.
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Mutual funds can help reduce risk
By their very nature, mutual funds eliminate one risk - that of investing too heavily in a single company or security. Mutual funds provide diversification by investing in dozens or even hundreds of securities. They also provide professional management, quick access to your money and a wide range of convenient services.
Of course, keep in mind that some mutual funds are riskier than others. For example, international funds are typically riskier than balanced funds, while small cap funds are generally riskier than large cap funds. In contrast, bond funds that focus on providing predictable income are often considered low risk investments.
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What's the right investment strategy for you?
Your financial professional can assess your risk tolerance - and help you sort through the many decisions that go into finding the right mix of First American funds for you. |
