Gauging Risks Can Be Tricky : Investments: A shock may await American savers when the first significant reversal hits stocks, bonds and mutual funds.

Hordes of American savers and investors are said to be courting trouble right now, taking risks they don’t fully respect.

Sooner or later, many financial analysts warn, a day of reckoning will come for individual and family money managers who are shifting assets out of government-insured bank deposits and into market-based alternatives like mutual funds.

“Money continues to flow into equity and bond mutual funds at a staggering pace,” says Michael Metz of securities firm Oppenheimer & Co.

A shock presumably awaits all the newcomers when the first significant reversal hits stocks, bonds and mutual funds.

When they realize they are suffering losses of their principal, it is feared, these neophytes will flee in panic, possibly turning a moderate pullback by the markets into something much worse.

The situation is starting to draw political flak. “Congress is quietly putting pressure on the mutual fund industry to upgrade sales and advertising standards,” reports the trade newspaper Mutual Fund Market News.

“The message from Capitol Hill is subtle but evident: ‘If you don’t do it, we will.’ ”

Financial industry leaders, at the same time, are issuing high-visibility warnings about market risks.

Six trade associations in banking, for instance, are working up guidelines for the sale of mutual fund shares and other uninsured products in banks where deposits are covered by federal deposit insurance.

“Information given to customers should contain conspicuous and prominent notice that the product is not insured by the FDIC, that it is not an obligation of or guaranteed by the bank, and that it may involve investment risk, including the possible loss of principal,” a statement from the group says.

Nobody disputes the validity of this sort of caution. Stock and bond prices have been rising so strongly for so long that it is hard even for professionals to remember what a sustained bear market is like.

At the same time, though, some observers question whether it is accurate to presume that investors are shifting into market investments simply out of ignorance or greed, and that they would absolutely be better off taking no chances.

“The longstanding definition of risk is loss of principal,” notes Greg Smith, investment strategist at Prudential Securities. “However, as many people who were determined to make sure they suffered no principal loss in the 1990s have discovered, there are other ways to define risk.

“The risk of staying with CDs as disinflation took hold and interest rates plummeted was that the rate of return on one’s savings also plummeted,” Smith adds. “CD holders face the risk that their savings may not accomplish what they hoped for when they deferred consumption.

That hope, he says, may have been to send children to college, buy a retirement home or create a fund for future health and retirement expenses.

Or indeed, it may have been merely to provide income for current living expenses from the interest one’s capital could earn.

By this line of reasoning, analysts said, it has been no favor to investors lately to scare them out of taking any risk to their principal. Such an approach has only guaranteed them the safety of falling behind.

On the other hand, market partisans can’t be blindly heeded either. Consider the example of anyone who put $100 in a representative sample of stocks in 1929 and had $11 left three years later. It took 22 more years before that investor got back to the break-even point.

But financial advisers say there is a readily available tool to use in managing risk in its many forms--diversification.

The idea, in plain terms, is to spread your money among equity investments like stocks and real estate, and interest-bearing investments both short- and long-term. That way you compromise your chances to make a killing, but you also limit your vulnerability to market swings.