Looking at Risk Versus Reward

In general, investments involving stocks and bonds earn a higher rate of return than savings accounts. However, there is a trade-off for that greater return, and that is the risk that the value of your investments may not increase, but may actually decrease.

Here's an example of the risk–reward relationship:

If you save $1 every day from the time you turn 18 until you are 65 years old, and your money earns 2 percent interest, you could have nearly $28,468 when you reach 65. Because this investment has a relatively low rate of interest, it's probably pretty low-risk.

Alternatively, if you invest the same amount in a stock mutual fund that earns a 10 percent return, you could have nearly $397,398 when you turn 65. However, because this investment has a much higher return, it's likely more risky and volatile (lots of ups and downs). This means there is a greater possibility that you may not make money and, in fact, could lose some of your original investment.

Be sure to factor the risk–reward trade-off into your investment decisions. If you have the time and inclination, taking investment risks now could potentially pay off big in the future.