Managing risk in your investments
Successful investing is based on managing risk — understanding what risk means and using it to your advantage.
Risk refers to the chance that an investment's value or return will be lower than expected. Investments with potential for greater loss are viewed as riskier than those with a lesser chance of loss.
However, the risks associated with investments differ in the long-term compared to the short-term. In the long-term, so-called "risky" investments may offer a greater chance of reaching a financial objective.
For example, a government bond that guarantees a return of principal and $100 interest after 30 days is risk-free in the short term, since the return will always be $100 regardless of events in the financial markets, if held to maturity. In contrast, common stock may have the potential of earning as much as $200 and as little as $0 and offer no protection of principal.
In the long-term, the picture changes. Based on historical stock performance, risk faced by stocks declines over the long-term. The risk faced by government bonds increases, however, since their long-term returns they offer are frequently outperformed by other types of investments and may not always keep up with inflation and taxes.
The risk and return of any one investment should be viewed in relation to your total investment portfolio — the combination of investments you’re making. If you hold just one or two accounts, you are more exposed to risk than if your money is more widely diversified. Diversification means investing in instruments which behave differently during a given economic situation or time period. Diversification is not a guarantee against loss, it is a method used to manage risk.
A Financial Advisor can help you determine an appropriate level of risk and diversification for your financial goals, profile and time horizon. Talk to an advisor or representative today about developing a customized investment strategy.