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Investing Risks and Rewards

(Play to Win)

Inflation is the No. 1 reason to invest. If you keep your money in your plain old bank account, it’s losing purchasing power by the minute. Inflation means that the same dollar you have in your pocket today won’t buy as much in the future. For example, you need $147 in today’s money to buy the same stuff that $100 would have bought in the year 2000.

Inflation rates vary, but most estimates figure a 2-4% increase every year. A typical basic savings account (as of 2018) offers a 1% interest rate or less. So, even if you’re doing a great job saving, you’re still losing power.

You can get slightly higher returns on certificates of deposit (CDs) and money market accounts, but the only real chance to outpace inflation is to invest in the stock market, which historically has returned 8-10% (as long as you keep your money invested).

There’s no right or wrong level of risk. A safe investor has to contribute more capital than a risk-taking investor to reach the same target, but the risk-taker exposes themselves to more potential losses.


One rule of thumb is to subtract your age from 100 to find a mix of stocks and bonds. In most instances stocks are considered more volatile than bonds. If you’re 30 years old, you might aim for 70% stocks and 30% bonds.

Because we are all living longer these days, some advisors are now using 110 as the starting number. So, a 30-year-old might aim for 80% stocks and 20% bonds.

As you get closer to retirement, your mix moves more toward the safer investments so that you can be sure the money will be there when you need it.

These days, brokerages, robo-advisors and investment apps have made choosing investments much more user-friendly, and even fun. Target date funds automatically adjust the risk level as you get closer to your desired retirement year, while online investment sites offer curated options based on your goals, values and timeline. (But, remember, nothing is guaranteed.)


One of the best ways to protect against big losses is to spread out the risk among a variety of investments (stocks and bonds, domestic and international, private and public, small and large, various industries, etc.).

Some things are common sense, even if you don’t know anything about investing. For example,

  • If you invest in a very small segment of the market, you will feel the volatility of that segment more.
  • Large companies are generally more stable than small start-ups.
  • International stocks and bonds are affected by the politics and economic environment and currency in that region.
  • High-yield (or “junk”) bonds have the potential to earn higher returns, but they often have low credit quality ratings. So, it’s like loaning money to someone who might not be able to pay you back.

When you’re in the planning stage, it’s more important to identify the types of investments you want in your mix rather than the specific funds and stocks. Once you set your plan in motion, don’t tinker too much because of fees. Check in with your investment mix and make adjustments at least once a year or so to make sure you’re still hitting your target risk level.

Young man skateboards while thinking about the risks and rewards of investing.


If you’re saving for a home down payment that you’ll need in 3-5 years, you don’t want to risk losing a big chunk of it just when you need it. Choose safer options, such as a money market account.

Likewise, if you have a new baby and you’re already feeling the pressure of saving for their college, 529 college savings plans are potentially a good way to go. Think of it this way, it’s hard enough to save hundreds of thousands of dollars over 30 years to spend down in retirement, but doing it in 18 years, and then spending it down in 4 while your child is in college is even harder. You can’t control the market that much if you’re starting from zero. The more capital you have to begin with, the easier it gets.

Investing doesn’t have to be a wild roller coaster ride. With some planning, you can earn healthy returns over time with modest effort and potentially attractive rewards.

As always, we’ve got your back. — The On Your Own Team End of article insignia

[Any reference to a specific company, commercial product, process or service does not constitute or imply an endorsement or recommendation by On Your Own, the National Endowment for Financial Education or any of its affiliate programs.]