Stocks may have a reputation for being riskier than bonds, but you should also consider the risk that investing only in bonds may not accumulate enough money to finance all your aspirations in retirement.
It is true that stocks are more volatile than bonds, and there is no guarantee they will yield income, but they do provide the opportunity for growth. So, would you rather have a more reliable option with less income, or higher growth potential without a guaranteed return? If you’re like many people, you invest in a little of both, hoping that a diversified mix will smooth out periods of volatility but still provide a reliable return on investment. Keep in mind investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
One of the keys to investing is knowing what risks you’re willing to take and what’s absolutely off the table. Once you establish these parameters, it’s a good idea to put your strategy down in writing. This helps both you and your financial advisor stay on track, even when the markets hit a rough spot. Knowing what kind of strategy fits within the context of your own goals, risk tolerance and investment timeline can help you stay focused on long-term results, not temporary swings in the market.
Part of knowing yourself is knowing what your limit is for adjustments to your investment portfolio. Investors who enjoy making trades in reaction to market activity may use just a portion of their assets to do so. As a general rule, diversifying across an appropriate blend of assets based on your timeline, financial goals and tolerance for risk is a good way to work toward your long-term goals without constantly wondering if you’ve made a wrong move.