Volatility in the stock market may have you thinking that the only safe place for your money is under your mattress, but no matter where you stash your cash, there are risks:
Buying power risk—Savings accounts, CDs and money market accounts are “safe” because you’re guaranteed to get all your money back. But when the interest rate paid on these secure investments doesn’t keep pace with inflation, the buying power of your money may actually decline.
Liquidity risk—Many investments, such as stocks and bonds, offer higher returns than CDs and savings accounts. However, this may mean tying up money for longer periods of time. The investment may be difficult to sell or may have to be sold at a loss if money is needed quickly.
Interest-rate risk—An increase in interest rates is generally a good sign for investors, except for bond holders and others who receive a fixed income from their investments. The value of bonds generally declines when interest rates go up.
Market risk—Unlike a CD or savings account, where investors are guaranteed to get back all their funds, some investments may actually lose money. There is a chance that a stock, mutual fund or real estate investment will lose all or a portion of the investor’s money.
Reinvestment risk—Generally, the longer money is tied up, the better the return possible. But the investor might not be able to reinvest at the same favorable rate of return if rates have dropped.
Your investment advisor can help you determine your risk tolerance and formulate a balanced strategy to keep risks to a minimum.