If you create an investment portfolio to finance your retirement, a child’s college education or another goal, one of the most important issues you’ll have to address is risk. The mix of assets that you choose and the amount of risk you assume will depend on several individual factors.
How Do Investments Typically Perform?
Stocks are generally more volatile than other investments, such as bonds (i.e., stock prices go up and down more than those of bonds). Over long periods of time, stocks tend to perform better than other investment types, although no one can predict how a particular stock or the stock market in general will perform.
What Is Your Goal and When Do You Hope to Reach It?
Think about why you’re saving, what you hope to achieve and when. If you want to invest for retirement, you’ll have to figure out when you want to retire and approximately how much money you’ll need. That information will help you decide how risky your portfolio should be.
How Comfortable Are You With Risk?
Some people are more comfortable with risk than others. If you’re focused on maximizing your returns and your retirement is decades away, you may decide to put most of your money into stocks, even though they’re risky, in order to earn a good return on your investment. If, on the other hand, the thought of possibly seeing your balance plummet makes you nervous, you may want to take a more conservative approach and invest a smaller percentage of your money in stocks.
How Should Your Approach Change Over Time?
A diversified portfolio includes a mix of different types of assets in order to manage risk. The breakdown of your portfolio should change as you approach your goal.
If your retirement is a long way off, you may be comfortable with a significant amount of risk. Even if your portfolio takes a hit during an economic downturn, it will have plenty of time to recover.
As you get closer to the date when you’ll need to withdraw money from your investment account, your asset allocation should shift to a lower percentage of stocks and a higher percentage of less-risky assets. Focusing on safer investments can protect you from large market fluctuations in the final years before you need to withdraw funds.
Talk to a Financial Advisor
Figuring out how to save for retirement or another long-term goal is difficult. Many people aren’t well versed in how investment accounts work or how to select the right asset allocation. Every situation is unique. A financial advisor can discuss your goals and risk tolerance, and help you decide which approach is best for you.
