Risk and Return

Financial Risk

To gain a full appreciation of the factors that affect saving, it's necessary that we examine the relationship between risk and return. There are many ways to save money and build wealth, some of them riskier than others. The more risk, the more potential you have to build wealth (return). As an example, let's compare two ways to make your money grow: a savings account and a stock. A savings account has very little risk; the Federal Deposit Insurance Corporation (FDIC) insures the money you put into it. There is very little chance of losing your money. On this type of account you would probably earn about 1.5% interest. Stocks, on the other hand, are very risky. There are many factors that can cause you to lose your money, but in return for the increased risk, there is the possibility of a much greater return than many other investment methods. Over long periods of time, the stock market has returned between 10% and 11% in profit to wise investors. For investors whose participation in the stock market will be for a period of less than twenty years a more modest return of 6% might be expected.