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In general, there are two types of risk involved in investing:

  • Investment (short-term) risk; and
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  • Inflation (long-term) risk.

Like most things in life, all investments have risk. When you make investment decisions, it’s important to understand the types of risk involved, and their relationship to the amount that you can earn on your investments (known as rate of return). This knowledge can help you create an investment strategy that’s best for your personal situation.

In general, there are two types of risk involved in investing: investment (short-term) risk and inflation (long-term) risk.

Investment (Short-Term) Risk

Investment (Short-Term) Risk

Risk that your investment may decrease in value in the near future.

Investment (short-term) risk is the risk that your investment may decrease in value in the near future. Take, for instance, the stock market. The value of a stock can fluctuate (increase and decrease) significantly over short time periods. For this reason, stocks are often referred to as “volatile” investments and have a higher level of risk than other types of investments.

At the same time, history has shown that stocks can be an excellent long-term investment. U.S. stock market returns have historically outperformed other types of investments and beaten the rate of inflation over the long-term. In general, you increase your ability to earn higher rates of return on your long-term investments (generally 10 years or more) when you take on more investment risk.

If you’re nearing retirement age, minimizing exposure to investment risk may be more important. Under the Annuity Plan, the benefit you receive at retirement is based on the value of your account at the time you retire and elect to begin receiving payment of your benefit. Therefore, as you prepare for retirement, you may want to minimize your chances of a sudden investment loss. If you have several years until you plan to retire, however, you may be more concerned about minimizing your exposure to inflation (long-term) risk. Inflation is an increase in the level of consumer prices or a decrease in the purchasing power of money.

Inflation (Long-Term) Risk

Inflation

An increase in the level of consumer prices or a decrease in the purchasing power of money. Inflation can be caused by an increase in available currency and credit above the availability of goods and services.

Inflation (Long-Term) Risk

Risk that the purchasing power of your money will decrease over time because of inflation.

Inflation (long-term) risk is the risk that the purchasing power of your money will erode because of inflation. Inflation is a serious risk for any long-term investor.

Conservative investors may feel that it’s “safer” to lower their investment (short-term) risk by avoiding stock investments. However, they miss earning potentially higher rates of return. A conservative investment strategy may be appropriate if you’re nearing retirement. However, if you invest too conservatively over long periods, you may be taking on unnecessary inflation risk.

Diversification

By investing your money in different available options (diversifying your investments), you may be able to reduce your exposure to any one type of risk.

Diversification

By diversifying your investments – or putting your money in several investment options available through the Annuity Plan – you may be able to reduce your exposure to any one type of risk.