Inflation, the rise in prices over time, can erode your investment return. Long term investors should be aware that, if portfolio returns are less than the inflation rate, their ability to purchase goods and services in the future might actually decline. However, portfolios with long-term returns that significantly exceed inflation are associated with a higher degree of risk.

The table below presents a hypothetical worst case loss, expected gain, and best case gain of five sample portfolios over a one-year period with an initial $100,000 investment.

Investing involves a trade-off between risk and return. Historically, investors who have received high long-term average returns have experienced greater fluctuations in the value of their portfolio and more frequent short-term losses than investors in more conservative investments have.

Historically, markets have experienced downturns, both short-term and prolonged, followed by market recoveries. Suppose you owned a well-diversified portfolio that fell by 20% (i.e. $1,000 initial investment would now be worth $800) over a short period, consistent with the overall market.

The following graph shows the hypothetical best and worst results of five sample portfolios over a one-year holding period. The best potential and worst potential gains and losses are presented. Note that the portfolio with the highest upside also has the largest downside.

I am comfortable with investments that may frequently experience large declines in value if there is a potential for higher returns.