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?
Learn how to determine your own investment mix.
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:
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.
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:
Losing money is an obvious risk with any investment, but there are others you may not have considered: