Do you understand risk?

Several recent surveys of investor behavior in recent years have found that many people run from the market when it drops and dive in when it's up. In effect, they're selling low and buying high.

"To maximize returns, the ideal strategy is to buy stocks at a low price with the hope of selling them at a higher price," says Rui Yao, a University of Missouri assistant professor in the Personal Financial Planning department. "However, many investors seem to be unwilling to take risks when the market is at a low point and seem content to only invest when the market is at a high point."

Chuck Jaffe examines several types of risk, which he says many people don't understand.

• Purchasing-power risk: Most people who want to avoid risk actually mean they want to avoid loss. They remove everything from the market and put in their mattress, a piggy bank or a money-market fund—all providing roughly the same return these days.

While those methods protect against market risk, or the chance that, say, a double-dip recession or "flash crash" will drive down the value of any savings or investment holdings, they run the risk that inflation will outpace any asset growth.

• Interest-rate risk: This is a key factor in the current rate environment, where the Federal Reserve's main interest rate hovers near zero.

Investors face potential income declines when a bond or certificate of deposit matures and they need to reinvest the money at near-zero rates. By contrast, for investors who go chasing returns by using higher-yielding, longer-term securities, the potential arises to get stuck losing ground to inflation if the rate trend changes.

• "Shortfall risk": This is the possibility that someone won't have enough money to reach financial goals. Many investors take this risk when they are too conservative during troublesome market times or too aggressive when things are good.

Investors who went whole-hog into technology stocks during the dot-com bubble got hammered when it popped; today's sideline-sitter, conversely, might be missing out on low-priced stocks as they wait until they are more comfortable.

• Timing risk: This is not so much about when you are buying or selling as it is about your personal time horizon. To put it simply, the chance of stocks making money over the next 20 years is high; the prospects for the next 18 months are murky. If you need money at a certain time, this risk must be factored into your asset allocation.

"If the studies show anything, it is that investors definitely don't understand opportunity risk," Jaffe writes. "Consider this the greed factor, the chance of missing out. Opportunity risk runs against innate human psychology, as people perceive opportunities at just the wrong times. They will jump to buy when the market is at the end of a good run and hesitate when the market has fallen to lows that have put quality companies on sale."