4.6 Risk and Diversification

Notes

Risk is the chance an investment loses value or earns less than expected. Higher possible return usually comes with higher risk.

• Diversification means spreading money across many investments so one loss hurts less. "Don't put all your eggs in one basket."
• A longer time horizon (years until you need the money) generally allows more risk, because there is time to recover from dips.
• Short-term goals fit safer places such as savings accounts.
• Example: you put $1,000 into one stock that falls 50%. You have $500. If you had split it among 10 stocks and only one fell 50%, you would lose just $50.
• Diversification lowers risk but does not remove it.