In investing, risk and return generally go hand in hand: the higher the return potential, the more risk you’ll have to accept. And while investors tend to define risk as the potential for declines, it means more than just market volatility. But too often we focus on the risk of declines and ignore the risks of not investing. For example, an all-cash portfolio will have little, if any, change in value over time, but it also won’t provide any growth potential to keep up with inflation, which could put your retirement and investment goals at risk.
The key is ensuring you are taking the appropriate amount of risk to achieve your goals. Your financial advisor can help you answer the following:
What is my comfort level with risk?
Understanding this can help your financial advisor decide how you might react to market ups and downs over time.
How much risk am I able to take?
The amount of time you have to invest plays an important role in determining this, along with other factors such as your income needs.
How much risk do I need to take?
You’ll want to work with your financial advisor to calculate the return, and therefore the risk, that may be necessary to reach your long-term goals.
In addition to your investment portfolio, you’ll also want to discuss how to protect against unexpected events that could get you off track. Your financial advisor can help you build a portfolio that balances your comfort level with market ups and downs with the risk necessary to achieve your financial goals. This can help to avoid what may be the biggest risk you face: not achieving your long-term goals.