Before choosing investment options, it’s important to understand the relationship between risk and reward.  As a general rule, higher-risk investments generally have higher potential rewards but also higher potential losses. 

Risk is inherent to investing. You can't guarantee that you'll make money on an investment, and the possibility always exists that you may lose money. If you’re an extremely cautious investor, you may run the risk that inflation will outpace your earnings and erode your purchasing power.  On the other hand, higher-risk investments tend to be more volatile, to have more "ups" and "downs," which can be disastrous for short-term investors.  Risk tolerance, the ability to accept risk, varies among individuals. You should determine your risk tolerance before you invest.

Once you’ve assessed your risk tolerance, review these investment styles to determine what type of investor you are.

The conservative investor. If you’re a conservative investor, you are likely not comfortable with the idea of losing any of your principal, the initial amount of money invested. You may prefer to put your money in fixed-return investment vehicles that guarantee return of principal plus interest. Savings accounts and certificates of deposit (CDs) that are generally insured by the Federal Deposit Insurance Corporation (FDIC) for up to $100,000 are examples. Be aware, however, that the rate of return may not outpace inflation, so there is still risk — inflation risk, or the risk of losing earning power.

The moderate investor. If you are a moderate investor, you don't want to lose your principal but you also realize that in order to receive higher returns you generally have to assume some risk. You may be comfortable with a combination of low- and higher-risk investments. While you may flinch when the market drops, you understand that the potential for higher long-term gain may mean having to ride out the dips.

The aggressive investor. If you are an aggressive investor, you are more willing to accept market swings. You seek a higher potential return from your investments. While this winner-take-all attitude may hold the potential for greater gain, it also holds the potential for greater loss. This type of aggressive investing is only for the truly aggressive investor and is best suited for long-term financial goals.

Understanding the Risk/Reward Relationship
In choosing investment options, it's important to realize that risk and reward have a parallel relationship. Generally the riskier the investment, the higher the potential reward — or the potential loss.