Value Line University

Risk

All investments involve risk of one kind or another.

The general rule of investing is that risk is linked to total return, or what you get back in terms of price appreciation and dividends on your investment. The greater the risk you take, the greater your return should be. The less risk you take, the less return you should expect.

You can manage the risk of losing money when you invest in stocks by creating a diversified portfolio of a variety of stocks in a range of different industries. That allows you to balance potential losses in one stock against potential gains in another, since certain stocks and certain industries tend to perform well when others lag and vice versa.

You assess risk as part of making investment choices. If you are primarily concerned with preserving your principal, you should build your portfolio around stocks that Value Line ranks 1 or 2 for Safety. The return based on price appreciation that you can expect on those stocks may be lower than the return you could expect from stocks with lower Safety ranks. On the other hand, you can be fairly confident that those stocks will be more price-stable than the market in general during a period of falling prices, even though there is no guarantee that, in a market slide, these stocks won't also decline in value.