Risk, and the role it plays in a portfolio, can be among the most difficult concepts to understand fully. Sometimes our view of risk isn’t something we consider until there’s a sharp market downturn or other activity that compels us to question our tolerances. To help bring the positives and negatives of risk into clearer focus, here are four important risk-related considerations for investors.
1. Risk has many faces
The term “risk” usually refers to investment risk: the idea that you could purchase stock at $50 a share and it could be worth $25 a year later. This kind of risk is relatively easy to understand, and it’s measurable based on the ups and downs in an investment’s price. The more volatile the price has been, the riskier the investment is considered to be.
Investment risk is only one risk investors can face. Others include:
There are other types of risk, too, including some specific to certain investment categories. For example, bond investors face default risk — the risk that the issuer will fail to make interest payments or repay the bond’s par value at maturity.
2. Risks are usually linked to expected return
This is possibly the most important thing to understand about risk. Risk and return generally go hand-in-hand: If you put money into a low-risk investment, you should probably expect lower returns. If you choose a higher-risk investment, you’re likely seeking higher potential returns.
Of course, things don’t always work out the way you expect. A high-risk investment may not get better returns. (In fact, you could lose your entire investment.)
3. You should determine your risk tolerance
Your risk tolerance is how much risk you can comfortably live with in your portfolio. Determining your risk tolerance can be challenging. One indicator that you’ve exceeded your investment risk tolerance: when your investments’ performance keeps you awake at night — especially when there’s market volatility.
It’s OK to have a relatively low risk tolerance. However, focusing on lower-risk strategies may mean that you need to adjust your objectives — for example, having $750,000 at retirement instead of $1 million. Or, you may need to increase the time until you tap into your investments. For example, you may decide to work until age 67 instead of 65 so you have more time to earn money, add to your portfolio, and wait before you begin to withdraw funds.
4. Help is available
Because risk is complicated — and only one aspect of investing — consider looking to a financial adviser for help with building your portfolio. A financial adviser will take the time to get to know your goals and understand your risk tolerance before recommending an investment plan.
All investing involves risk including the possible loss of principal.
Equity securities are subject to market risk, which means their value may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Investments in equity securities are generally more volatile than other types of securities.
This article was written by/for Wells Fargo Advisors and provided courtesy of Ponte Vedra Wealth Management Group in Ponte Vedra Beach at 904-273-7918.
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