Selecting the right investment strategies for your portfolio can seem overwhelming, especially for a new investor. Whether you know what yours is or not, every investor has a specific risk tolerance that shapes the investment decisions they make. Some types of investments are naturally riskier than others, but it doesn’t mean those are better or worse than the next type. We’ve taken a close look at the ins and outs of investment risk and how to evaluate your risk tolerance when managing your portfolio.
Risks Associated With Different Investment Types
Every type of investment has a different level of risk associated with it. Some of the common investment types include:
- Cash – this is considered to be one of the least-risky investments and typically involves putting money in bank savings accounts, certificates of deposit (CDs), or other money market accounts. The interest rates are very low, but the risk of losing money is also very low.
- Bonds – these are fixed-income investment options that offer a predictable, and usually low, return on investment. There are various bonds to choose from, but most are considered to be low risk.
- Mutual funds and ETFs – these types of investments provide investors with more flexibility. You can choose a lower-risk mutual fund or ETF to protect against market volatility, or opt for a higher-risk option to potentially increase your returns.
- Stocks – this is one of the most common investment types. Stocks are perceived by some investors to be safe and secure, while others perceive them to be risky and don’t want to invest in them. Stocks in one company can be riskier than others and many different variables play a role.
While these are not the only investment types to consider, they are the most common ones and illustrate the differences in risk and compares the potential returns associated with them.
Evaluating Your Risk Tolerance
Have you ever heard two people talk about an investment as being too risky and too conservative at the same time? The truth is neither party is wrong, and the difference lies in their risk tolerance. Using market volatility as an example, some investors choose to pull their money out of their investment vehicles when uncertainty strikes. These investors are considered to have low risk tolerance. Other investors may invest more money during high periods of market volatility because they want to take advantage of the potential swings in the future. These investors have a higher risk tolerance. Neither investor is wrong in their assessment, and the difference in opinion is because of their risk tolerance levels.
Managing Investment Risk And Adjusting Your Portfolio
It’s normal for the risk tolerance of an investor to change over time. Life circumstances can change over the years, so it’s important to manage your risk and adjust your investment portfolio accordingly. However, before making a significant investment, it’s important to evaluate the potential risks and assess whether they align with your overall financial goals. Being flexible and willing to adjust is important, but you also don’t want to make too many reactive decisions based solely on market volatility.
Stock Investing Info can help you understand your risk tolerance and shape your investment strategies simultaneously. Don’t hesitate to contact us if we can help in any way.