ING Brief: April 2003
Understanding Investment Risk
Risky business?

No matter where you put your money, investing is usually a risky business - some investments are just riskier than others. But should the possibility that your investments won’t react to the market in the way you’d like prevent you from investing for your future? Certainly not. The solution is to determine what your tolerance is for risk, and invest accordingly.

Risk tolerance is an investors’ ability to handle declines in the value of an investment portfolio. And, while no one wants to see the value of their portfolio decline, the level of your ability to weather a volatile market (along with your goals and time horizon) will determine which investments are right for you.

Generally speaking...

Of all the investment categories, historically, stocks have greater potential risk and reward than other kinds of investments, such as bonds or money market instruments. And, while history doesn’t guarantee future performance, stocks have also had higher returns over the long-term. Greater losses, too, especially when you look at year-by-year performance.

For most of the new millennium, with the impact of September 11th, corporate accounting scandals, and political turmoil, the stock markets have seen increased volatility and most stocks have regularly posted negative returns. For many investors, these times have been increasingly difficult. However, investing, when done according to your tolerance for risk, can still help you achieve your life’s goals, especially if you properly diversify your investments (see the September 2002 issue of Vanguard Magazine for ING’s discussion of diversification) and understand what your time horizon means to your investment strategy.

Time horizon

Your investment time horizon is one of your most important investment considerations. It will determine which vehicles may be appropriate for which financial goals. Generally speaking, the more time you have, the more short-term risk you may be able to weather in seeking potentially larger long-term investment gains. If you won’t be retiring for 20 or more years for example, you may have time to ride out today’s current equity market volatility.

If, on the other hand, your goal is more immediate, you may want to choose more conservative investment vehicles. Sending your sixteen-year-old to college, for example, may call for a savings account, short-term CD or conservative mutual fund. Or, if you plan to retire in five or fewer years, you may want to consider more conservative income and/or guaranteed return investments within your City and County of San Francisco 457 Deferred Compensation Plan.

The first steps

When looking at your portfolio, consider the following topics to help you on your way to reaching your financial goals:

Asset Allocation - When determining an investment strategy, consider your investment time horizon, your tolerance for risk, your full range of investments, your current financial obligations and income - in short, make sure your strategy for how you diversify your dollars tracks with the circumstances of your life.

Get help - Seek information and education from an investment professional if you’re unsure how to react to market volatility within your own investment strategy. What we can tell you is that it’s never been more important to pay attention to the basics.

Diversification - Make sure you spread your dollars among a variety of investment categories and vehicles (i.e., stocks, bonds, bills - and the various kinds of each).

Discipline - Use a disciplined strategy for saving and investing dollars to achieve your various financial goals, and for managing your income and expenses.

For more information on understanding investment risk, contact your ING representative Meghan Doherty at 1-415-364- 2017.


Home

Main Menu