Two General Risks

Investors face two general types of risk.

Losing money

First, there's the risk of losing money over the short term. Over the last 100 years, the stock market has returned around 10% per year, on average. However, looking at individual years over that time period, about one out of every four was a down year in the market.

And over shorter time periods—a few weeks or months—investments can be even more volatile.

Investors focus almost exclusively on this type of risk. It's easy to do. Every day you hear about how the market is doing on the radio and television. And if that's not enough, you can check your stock prices throughout the day.

Not meeting your goals

Don't let volatility get the best of you, though. If you do, you'll virtually ignore the second and perhaps even greater risk that comes with investing: the risk that you won't meet your goals.

How can obsessing about volatility get in the way of your goals? It may cause you to invest too conservatively. Volatility also may lead you to buy or sell an investment based on short-term performance rather than on how this purchase or sale will help you reach your goal. In short, volatility can prevent you from seeing the forest for the trees.

Weigh how important reaching your goal is against how much short-term volatility you're willing to accept.