MONEY OBEDIENCE

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Financial risk cannot be avoided entirely, but balancing one kind of risk against another can contain it. A risk neutral asset allocation tries to balance various risks so that the exposure to any one kind of risk is not too large.

For example, purchasing power risk (losing value through inflation) can be balanced by assuming market risk (putting money into investment in the "markets"). That is, you might protect your savings from inflation by making your saved dollars earn more over the long run by putting them in the "market." Market risk and purchasing power risk have historically balanced each other out in the long run. It is a good idea to balance purchasing power risk with market risk in the future, even if past performance does not guarantee that things will work out the same way. If you did not assume any market risk you would still face purchasing power risk, and that can jeopardize your financial well-being in the future.