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On Christmas Day, the New York Stock Exchange and Capital Group’s U.S. offices will be closed.

In observance of the Christmas Day federal holiday, the New York Stock Exchange and Capital Group’s U.S. offices will close early on Tuesday, December 24 and will be closed on Wednesday, December 25. On December 24, the New York Stock Exchange (NYSE) will close at 1 p.m. (ET) and our service centers will close at 2 p.m. (ET)

Understanding risk

Everything we do — or don’t do — has an element of risk to it. What are the risks of investing and how can you get comfortable with them?

Develop an investment strategy

Learn how to determine your own investment mix.

- What is risk?
  When you make an investment, you risk the possibility that the value of your investments will go down, especially during periods of volatility when the stock market declines, or remain unchanged over time. At the same time, if you invest too conservatively to avoid volatility, you may risk missing out on periods of price appreciation that could help you reach your long-term goals.
  
  Some investments are more risky than others. Generally, the more risk you’re willing to take, the greater your opportunity for reward over the long term.
  
  There’s not a simple formula to follow to determine how much risk is worth taking; only you know how much or what kinds of risk you’re comfortable with. What’s more, your willingness to accept certain levels of risk will probably change during your lifetime.
  
  Start to determine your comfort level with risk by asking yourself two questions:
  
  1. What are my retirement goals?
  
  The more specific you are, the easier it will be to determine the level of return you’ll need and the level of risk you’ll need to accept to potentially reach those goals.
  
  2. When do I want to retire?
  
  If retirement is a long way off, you might consider more aggressive investments. Although your investment would be subject to the volatility of the stock market, a span of several years gives you the opportunity to ride out the ups and downs of a number of market cycles. But if you’re close to retirement, you might want to shift to investments with lower risk. In either case, talk to a financial professional to see what makes sense for your situation.
  
  Next, you’ll need to evaluate your investment options. Most investments fall into one of three broad categories:
  
  Stocks and stock funds — Historically, these have offered the highest potential reward but tend to have the highest risk and most volatility, and are more appropriate for long-term investors.
  
  Bonds and bond funds — These typically present less risk than stocks but generally have less growth potential than stocks.
  
  Capital-preservation funds — This category includes money market funds, or stable value funds, and offer the least volatility. Investors generally use them to help preserve what they’ve invested.
- Dealing with risk
  Losing money is an obvious risk with any investment, but there are others you may not have considered:
  
  Risk of inflation
  Inflation eats away at the value of a dollar. If your investments don’t keep pace with the rising cost of living, you’ve lost buying power.
  
  If you are a conservative investor or will be retiring soon, you may be attracted to cash-equivalent investments. Consider including enough stock or bond fund investments to keep you from falling behind rising costs. Keep in mind that much of your investment portfolio might still have a 10- to 30-year time horizon once you retire.
  
  Market risk
  Another word for market risk is volatility. Volatility may cause you to lose money if you need to sell your investment in the near future.
  
  Diversifying your investments and contributing regularly over a long period of time could help you address market risks. There’s no guarantee that putting your money in a variety of investments will eliminate risk, but it could help.
  
  Merits of diversification: Spreading your investments across a variety of asset classes, such as a mix of stock and bond funds or using a target-date fund that invests in a diversified portfolio for you, could help buffer the effects of volatility. Gains in one or more of your investments might balance out the losses you have in others.
  
  Riding out cycles: Investing over the long term won’t guarantee you a profit or prevent you from losing money, but making a regular fixed-dollar investment (called dollar cost averaging) can help compensate for the natural up and down cycles in the market. Because the prices of mutual funds fluctuate, dollar cost averaging allows you to buy more shares when prices are lower, and fewer shares when prices are higher, which could help lower average cost per share. Before using this strategy, though, make sure to consider your willingness to continue investing while share prices are declining.
  
  Risks of investing outside the U.S.
  Though there are unique risks associated with investing outside the U.S., the international marketplace may have a lot to offer some investors. Foreign markets often move in their own market cycles, so investing abroad may help to counteract the effects of a down U.S. market on your portfolio. Investing abroad involves risks, such as currency fluctuations, periods of illiquidity and price volatility, as more fully described in the prospectus. These risks may be greater with investments in developing countries.
  
  Risk of avoiding risk
  When markets decline, it can be tempting to pull your money out or invest more conservatively until things calm down. But doing so could mean that you’ll miss all or part of a market upturn, which in turn could mean it will take you longer to reach your investment goal.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.

Although target date portfolios are managed for investors on a projected retirement date time frame, the allocation strategy does not guarantee that investors' retirement goals will be met.

All Capital Group trademarks mentioned are owned by The Capital Group Companies, Inc., an affiliated company or fund. All other company and product names mentioned are the property of their respective companies.

Use of this website is intended for U.S. residents only.

Capital Client Group, Inc.

This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.

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Understanding risk

Develop an investment strategy

1. What are my retirement goals?

2. When do I want to retire?