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Finance For Dummies

Finance For Dummies offers personal finance information on investing, retirement investing, finance, insurance, credit cards, loans and more. Personal finance education is our goal.

Saturday, August 05, 2006

Reduction of Risk Over Time

Risk is an important factor to consider when investing. You have to be able to accept risk if you want the opportunity at increased returns over a long period of time.

From 1926-2000 period you should understand that the highs and lows of performance will offset one another. And as time passes volitility lowers.

If you take 1-year, 5-year and 20-year time frames you can see this illustrated. Small cap stocks in one years can have returns as high as 130% and as low as -60%. As you get to 5 years it has dropped significantly and by 20 years your return will average 12.4% and your risk will be much less. Even if you do not like risk you can invest in small caps over the long term, it is no longer so risky.

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