When you invest, more risk means more potential rewards, and vice versa.
This does not mean that you should be wary of the wind for potential gain. This means that you should try to strike a balance between risk and reward in your investment and a great way to do this is to diversify your portfolio.
But what does a diversified portfolio look like? For starters, it holds investments that represent three main asset types: cash, bonds and stocks. Let’s talk about each asset class and what it means in terms of risk.
First, there is cash. Cash held in savings accounts and money market funds is considered to be the least risky investment.
You probably won’t lose money if you invest in cash, but you won’t gain much. The main risk you take is the risk of purchasing power – meaning your money may not grow enough to keep up with inflation.
The risk spectrum is the next bond.
With bonds, you can achieve a moderate return on a moderate amount of risk. Bonds can act as a stabilizer to stop the fluctuations in the price of stock investments.
Finally, stocks are considered the highest risk investment.
Of the three asset classes, stocks are the most volatile, meaning their value can fluctuate the most. This means the market is more risky.
We think the strongest portfolio has investments that give you exposure to three types of assets. You want to take enough risk to give your money a chance to grow, but not so much that sinking in the market will mean a huge loss.
You can learn more about diversifying your portfolio to control risk at vanguard.com/LearnAboutRisk.
All investments are at risk, including the potential loss of money you invest.
Diversity does not guarantee gain or protect from loss.
Investing in bonds is subject to interest rates, credit and risk of inflation.
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