Some investors can calmly accept the possibility that the value of their investments will move sharply higher or lower over very short periods of time. Other investors would have a hard time sleeping at night and might bail out of the market at the worst possible time. These investors often are more comfortable with lower levels of risk. So whether you consider your investment profile to be conservative, moderate, or aggressive, you need to determine how comfortable or uncomfortable you will be when the value of your investment moves up or down. Even if you are a low-risk investor, you can still consider diversifying into riskier investments as long as you keep the overall risk of your portfolio low.
All investments involve some degree of risk, including the possible loss of money.
However, making an informed decision to assume some risk also creates the opportunity for greater reward. It may seem logical that the safest kind of investment is the kind that seeks to preserve your money. For example, even an investment that you might consider relatively risk free, such as a federally insured bank certificate of deposit, is subject to the risk that inflation will rise faster than your earnings, leaving you with less real purchasing power than when you bought the investment. This type of risk is called inflation risk. Generally, this is the risk of being too conservative in your investments.