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Investment Basics

What About Risk?

When it comes to investments, risk is related to reward. The general rule is the greater the risk, the higher the reward. But you can't assume this will always be true. A poor quality investment is a poor quality investment, period.

When considering risk, here are some factors to consider:

Expected Return: It's impossible to gauge exactly how much an investment will actually return to you. Almost every prospectus, in fact, contains a statement something like "past performance is no guarantee of future success." But on the whole, unless something major changes, such as a change in a mutual fund's manager or a fire in a plant, an investment's returns averaged over several previous years will give you some idea how the investment will do in the future.

Volatility: The value of stocks and bonds fluctuates, depending on the market and the individual investment. It is measured by the volatility index. The volatility index indicates how much a stock or bond's value varies from its average price. It is quoted in + or - dollars. An investment with high volatility is a riskier investment.

Real Return: Inflation has a big impact on investments. During the 1970's, for example, bond and CD interest rates were very high. But the country was also suffering under double digit inflation. To determine the real return, subtract inflation rate from your gross return. So the real return on a 16% CD during a 12% inflation period would be only 4%.

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