Lesson 3: How risk works

Risk is not a bad word. It is the price of the chance to grow. The trick is to take only the amount of risk your goal can handle.

Risk is the chance that your investment is worth less than you hoped, when you need it.

Why values go up and down

Prices move because many people are buying and selling, and because the companies behind them do better or worse. You cannot predict this month's move. You can decide how much you can live with.

Time changes the picture

A fall hurts most when you need the money soon. If your goal is a child's fee in two years, a fall in the next year is a real problem. If your goal is retirement in twenty years, you have time to wait for values to recover, though recovery is never certain.

This is a way to think, not advice. Your own situation decides.

Three ways people reduce risk

1. Spread it out. Do not put everything into one fund or one kind of fund.
2. Match money to the date. Money for a near goal and money for a far goal should not sit in the same place.
3. Keep an emergency fund first. Then a sudden bill does not force you to sell at a bad time.

None of these removes risk. They only make it easier to live with.

The question to ask yourself

"If this fell by a fifth next year, would I still be able to wait?" If the answer is no, the amount or the choice is too big for you right now.

Next: lesson 4, how much to save for a goal, is coming soon. Meanwhile, try the education goal calculator to see how the date changes the monthly amount.

Mutual fund investments are subject to market risks, read all scheme related documents carefully. This lesson is for education only and is not investment advice.