Market risk is a chance that an investor takes. No matter what the long-term prospects of an investment or its probable intrinsic value, an asset may trade at any price in the market. A trading price is determined by the interactions of buyers and sellers. If there is more buying than selling of an asset, its price will rise; if there is more selling than buying, its price will fall. This means that an investment’s price can rise, fall and bounce around. The extent of these movements is usually described by the term volatility.

An important way to reduce the risk of investing is to diversify your investments. Diversification is akin to “not putting all your eggs in one basket.” For example, if your portfolio only consisted of stocks of technology companies, it would likely face a substantial loss in value if a major event adversely affected the technology industry.

There are different ways to diversify such a portfolio:
*You could invest in the stocks of companies belonging to other industry groups.
*You can allocate your portfolio among different categories of stocks, such as growth, value, or income stocks.
*You may include bonds and cash investments in your asset-allocation decisions (potential bond categories include government, agency, municipal, and corporate bonds).
*You might also diversify by investing in foreign stocks and bonds.

Investing in bonds offers more protection than stocks. In the event a company defaults on its bonds or goes bankrupt, bond investors get repaid ahead of shareholders. This lower risk is a big reason that the investment rates of return on bonds are significantly lower than they are on stocks.

Bonds are also called fixed income securities because they pay interest that is fixed at a coupon rate. (Although there are bonds whose coupon rates are variable, most bonds have a fixed rate.) As a result, the amount of interest income is fixed over the term of the bond. For bond investors, who are generally more conservative than stock investors, these predictable cash flows allow them to sleep at night.

Many of us fail to see the relationship between budgeting and saving. Budgeting is a process that starts by setting spending targets that help you to stay within your means. A personal budget is useful in controlling personal expenses.

Reasons for having a personal budget usually change over time. In our 20s, we focus on repaying debts or saving for a down payment on a home. We may want to budget in order to set aside several thousand dollars for a trip around the world. In our 30s and 40s, budgeting is important to help pay for our children’s living and college expenses. By the time we enter our 50s, saving for retirement becomes a major financial goal.