When it comes to investing, many people associate risk with losing money. But investing demands different forms of risk. Understanding each type — and the possible return linked with your retirement portfolio — can help you determine whether your investments are suitable for your situation.
Examining Risk and Return
Stocks historically have displayed the highest level of market risk — or the potential that an investment could lose value in the short term. Over extended periods of time, however, stocks have outperformed both bonds and cash investments. This risk/return tradeoff may impact how you allocate your investments. For example, consider weighting assets that you would like to keep invested for 10 years or more toward stock investments.
Bonds carry their own risks — credit risk, or the possibility that a bond issuer could default on interest and principal payments; and interest rate risk — the chance that rising interest rates could cause a bond’s price to fall. Ascending interest rates historically have influenced the prices of bonds more directly than the prices of stocks. When short-term rates are on the rise, investors may sell older bonds that pay a lower rate of interest — causing their prices to fall — in favor of newly issued bonds that pay higher interest rates. On the plus side, bonds historically have exhibited less short-term volatility than stocks, although past performance is no guarantee of future results.
It’s also important to look at cash investments, such as 3-month Treasury bills, from a vantage point of risk and return. Although Treasury bills typically experience a low level of volatility, they may be subject to inflation risk — or the possibility that their returns may not keep pace with the rising cost of goods and services. For this reason, you may want to use cash investments for short-term situations when you expect to access your money within 12 months or less.
Putting Risk in Perspective
Because all investments entail risk, you may want to assess your mix of bonds, stocks, & cash investments with an eye toward fashioning a risk/return profile that is fitting for your situation. Owning diverse types of assets may increase your chances of experiencing the benefits associated with each while mitigating the corresponding risk. Your retirement plan won’t be risk-free, but you can have the assurance of knowing that you’ve done what you can to manage a potential downside.
This article offers only an outline; it is not a definitive guide to all possible consequences and implications of any specific investment strategy. For this reason, be sure to seek advice from knowledgeable Wealthnest CERTIFIED FINANCIAL PLANNER®.
If you are concerned or interested in knowing what your risk level may be with your portfolio or overall financial plan, consider reaching out to myself or our offices and schedule a complimentary hour long financial physical. You can reach us at www.wealthnest.com or call 480-699-5275 for more information