onds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
vesting is a risky business. Often clients will say, “I don’t like to gamble”. I tell my client gambling is what you do when you drop that quarter in the slot machine at the casino and you have not possible outcome of the results! However, working with a Financial Advisor who has fiduciary responsibilities should be considered taking calculated risk. Understanding the different types of investment risk and the impacts they play on returns is critical for planning a successful, long-term investment strategy.
Many prospective investors eventually shy away from an investing when they hear the dreaded “R” word: risk. By itself, risk carries no special meaning or predictive result. However, Risk is relative to expected returns. But the idea that investing one’s money is not foolproof; that there are risks involved, and that a return is speculative — is enough to bury one’s savings into a secure bank account that earns a predictable interest rate. I teach my clients to always consider Total Return. Interest earned, minus applicable taxes and inflation. In most cases one’s savings could be creating a negative Total Return.
But not all risk is created equal. There’s “letting it all ride” on a long shot; (stuff you hear on the news or at the water cooler at work) and then there’s deliberate, calculated risk based on an investors age, net worth, investable assets, time frame and risk tolerance. Factoring in all these elements helps calculate risk that is associated with sustained, long-term growth.
Understanding the different types of risk is essential to evaluate whether an investment strategy aligns with your financial goals.
Risk and Return: A Closer Look
I’m writing today about three main types of investments: stocks, bonds, and cash investments. Let’s take a look at each:
Stocks typically carry the great level of market risk, and the highest potential for losing money in the short term. However, when looking at the long-term performance of the stock market, stocks have historically outperformed bonds and other cash investments. Consider allocating assets that you intend to invest for 5-10-plus years into stock investments.
Bonds carry multiple risks: interest rate risk, which impacts a bond’s price. We see this happening everyday now as the Fed is raising interest rates. Bonds also carry credit risk, which applies to the bond issuer and the possibility of default. Overall, bonds have historically been more stable over the short-term than stocks.
Finally, cash investments such as 3-month treasury bills and money markets are typically less volatile than both stocks and bonds. However, they may not keep pace with inflation and in some instances possibly create a negative short term Total Return. For this reason, you may consider these cash investments for short-term situations, such as those when you intend to access your money within the year.
A Broader Context, a Clearer Understanding
With the above in mind, assess your investments — stocks, bonds and cash investments — in terms of a risk profile that aligns with your current and future goals. By investing in different types of assets, you minimize the collective risk of each while increasing your chances at reaping any potential benefits.
No investment portfolio will be risk-free but taking these calculated risks can help you temper your losses.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.