As an investor, you will probably face risk. Even if you don’t invest at all and simply hold onto your cash, you still face inflation risk—the risk that the rising cost of living through inflation will dilute your buying power.
For instance, if you put aside $1,000 in cash in 1993, 30 years later in 2023, the buying power of that money would have dropped to less than half—just $478 (in 1993 dollars).1 It might make you feel safer to hold onto your cash, but it loses value every day due to the impact of inflation.
A world of risks
Stocks are the most popular types of investments, with more than 53% of Americans invested in the market through equities. Other popular investments are cryptocurrency, exchange traded funds (ETFs) and mutual funds.2
Despite their popularity, stocks and bonds carry multiple risks.
Among the risks stock owners face:
- Market risk: the risk that the overall market will drop.
- Sector risk: the risk that the industry or market your stock is in will drop.
- Economic risk: the risk that the economy will slump and drag down the stock market.
- Individual stock risk: the risk that your specific stock will drop in value.
- Geographical risk: the risk that the country or region you are invested in will hit hard times driving down the price of stocks in that location.
Fixed-income investments, such as bonds, also carry risks, such as interest-rate risk. If interest rates rise, typically the market value of many fixed-rate bonds tends to drop because investors can buy similar bonds with higher rates, reducing the attractiveness of the older, lower-yielding bonds.
You may be able to minimize interest-rate risk by investing in short-term bonds or notes, but they typically pay a low return, which would open you up to further inflation risk. You might avoid inflation risk by investing in high-yield bonds, but, again, you face interest-rate risk as well as credit risk, which is the risk that the bond may default and become worthless.