Risk: The Chance of Losing Purchasing Power

Oct 2007 //
Risk vs. Volitility
Inflation

One plausible definition of risk is the chance of losing money over the period of your investment objectives.  For example, if your goal is to achieve a competitive return over 5, 10, 15 or 20 years, and your account has declined in value (apart from withdrawals) over that time, then the risk of loss of principal has been realized.  A better definition of risk is the chance of losing purchasing power over the period of your objectives.  An example would be an investor whose account earned a return that was positive, but less than the rate of inflation.  Yet another way to define risk is the chance of not fulfilling your expectations—for example, failing to beat inflation by some given amount.