Understanding Investment Risk
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 wont react to the market in the way youd 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.
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 doesnt 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 lifes goals, especially if you properly diversify your investments (see the September 2002 issue of Vanguard Magazine for INGs discussion of diversification) and understand what your time horizon means to your investment strategy.
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 wont be retiring for 20 or more years for example, you may have time to ride out todays 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.
When looking at your portfolio, consider the following topics to help you on your way to reaching your financial goals:
For more information on understanding investment risk, contact your ING representative Meghan Doherty at 1-415-364- 2017.