My husband and I had a recent conversation the other day about investments I thought would be interesting to share. We discussed that there are two kinds of risks with investing. Most people think there is only one kind of risk…
The first risk is the obvious one, market volatility. When newbie investors launch into the stock market this is the risk that scares them. Will the value of my portfolio go down? Can I lose money? With any stock investment strategy, there is the potential to lose money, yes. Nevertheless, playing it safe is also a risk.
The second risk is not always so obvious. This is the risk of inflation and rising costs. If you play it safe and do not invest in stocks, you can place your investments in bonds, cds, savings accounts, with a much lower rate of return. These investments won’t go down in value, yes, but they also don’t go up that much either. If you place your entire retirement portfolio into safe bonds and cds, you may not make enough of a return to cover the standard rise in prices. Thus, your money may go down in value considering what things will cost.
The key is to understand both risks and how they play out together. Most financial advisors will tell you to balance your investments to cover both risk factors. Still, a lot also depends on what you are investing for and how long until you will need the money.
In most cases, with a diverse stock portfolio, market fluctuations balance out over a long period. Therefore, if your investments are for retirement and you are at least 10 years away from retiring, you will want your funds to be mostly stocks. As you get closer to needing to use your money, you will want to shift into less volatile, but lower return funds like bonds and cds.
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