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Understanding risk

Jeffrey Apps and Tracy Tutag

The goal of most investors is to make the greatest return on their money. But often, the size of the return depends on the level of risk involved. A higher potential return is typically associated with more risk and a higher potential loss. Ultimately, you must choose investments that offer a balance of risk and return potential that is appropriate to your financial goals and consistent with your risk profile.This isn’t always easy to do because all investments are influenced by various types of risk. However, by understanding the different risk classes, you can make educated decisions about the way you invest your money.Here are four broad categories of risk to consider:- Inflation risk – The concern that investment returns will not keep pace with inflation, leaving the investor with less purchasing power in the future. This is especially important over the long-term, where the cumulative effects of inflation can be significant.- Interest rate risk – The possibility that if interest rates rise, the value of an investment may drop.- Economic Risk – The concern that a downturn in the economy will influence investment earnings.- Market Risk – The possibility that adverse events in the market may have an adverse effect on the value of an investment.Dealing with these types of risk may seem overwhelming, but it doesn’t have to be. You can potentially reduce your risk exposure by using common sense and by employing certain investment strategies.Diversification, for example, is a strategy where you spread money among several types of asset classes (such as stocks, bonds and money market instruments) to lessen the impact of risk on your overall investment portfolio. This approach can work because each investment category is influenced by different economic, market and risk factors, and a loss in one investment may be offset by stable or increasing results of another.Dollar cost averaging is a second strategy to consider. Here, the impact of market fluctuations may be managed by investing fixed amounts on a scheduled basis. Dollar cost averaging does not, however, guarantee a profit or protect against loss in a declining market. In addition, dollar cost averaging involves a continuous investment in securities regardless of price and you should consider your ability to continue investing through periods of low price levels.If you would like to learn more about these and other investment approaches, let’s talk.Jeffrey Apps and Tracy Tutag offer securities and investment advisory services through AXA Advisors LLC (member NASD, SIPC), 1290 Avenue of the Americas, New York, NY 10104, 212-314-4600, and offers annuity and insurance products through an insurance brokerage affiliate, AXA Network LLC, and its subsidiaries. They can be reached at 926-0601 or tracy.tutag@axa-advisors.com.Vail, Colorado


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