The risks and rewards of investing
Investing ideas to keep in mind — from your short-term goals to the types of funds in your portfolio.
What kind of investor are you? The sort who is less concerned by the peaks and valleys of investing? Or do you prefer as steady an investing experience as possible?
The reward for holding on to your investments through both up and down markets is that your investments may grow in value. But you have to be willing to hold on through the long term in hopes of reaching your goals. If you go the slower route with less volatile investments, your investments will probably fluctuate less but may not reward you as much in the long run.
Search for the right balance
There’s no such thing as not taking any investment risks. Every investment holds some level of risk. Only you know how much risk you’re comfortable with. What’s important is that you find the right balance of risk and reward to help you meet your long-term goals, regardless of what happens in the short term. Your risk tolerance depends on several factors, including:
- your age
- when you’ll need your money
- your financial needs
- your assets
Know your investments
Most mutual funds are made up of a combination of stocks, bonds and cash-equivalents. Where do they stack up with respect to risk and reward?
- Stocks have the highest potential reward but tend to be the most volatile. (It's important to note that equity investments are particularly subject to market fluctuations.)
- Bonds can help provide a stream of income to reinvest in your account but tend to have less long-term growth potential and are typically less volatile than stocks. (Please note that the return of principal for any bond holdings in our funds is not guaranteed. Shares of bond funds and funds with bond holdings are subject to the same interest rate, inflation and credit risks associated with the underlying bonds held by each fund.)
- Cash-equivalent instruments such as money market funds offer the most stability but very little long-term growth potential.
Risk vs. returns. How do different investment mixes compare?
All mutual funds have different degrees of risk, so you can create a portfolio with choices that reflect your own risk tolerance to help you reach your investment goals. When you choose a mix of funds with different objectives and strategies, you are diversifying.
Diversification helps to reduce volatility risk by spreading your money among several investments. If one of them declines in value, the loss to your overall portfolio may be reduced because of your other investments. It's important to note that during some market declines, a variety of investments may decline. In these cases, however, diversification can still soften the overall effects on your portfolio.
Think long term
If you’re investing for the long term you may want to select growth funds, which contain mostly stocks. If you’re investing for a long-term goal such as retirement, you may not need your money soon and you can ride out the fluctuations typically associated with more volatile investments like stocks and growth funds. This strategy may help you reduce the risk that inflation will erode the value of your investments over time.
If you need your money soon and opt to take on more risk, understand that there’s a chance that you could find yourself cashing in your investments when the market is down. The shorter your investment time horizon, the greater the risk of loss.
For more information about risk and your risk tolerance, talk to your financial adviser.
Note: Be sure to discuss these issues with your financial adviser before making any changes to your financial plan.