Strategies for investment success

All investments have risks. In order to figure out how to manage risk, you must first understand it. Investment risk – or the risk of losing investment value – comes in many forms, including:

• Market risk – the likelihood that a security’s value will move in tandem with its overall market.
• Interest-rate risk – or the risk that the price of a bond will fall with rising interest rates.
• Inflation risk – or the chance that the purchasing power of an investment will be eroded by inflation.
• Credit risk – which refers to the risk that a bond issuer will not be able to repay its debt when the bond matures.

There is also the risk of investing too conservatively – not getting a high enough return to provide for your financial future. To effectively manage these elements of portfolio risk, you need to evaluate your personal investment goals and match these goals to your portfolio risks. Factors such as your investment time horizon and risk comfort level also must be considered. These will determine what kinds of and how much risk you are willing to take.

Balancing risk and reward

You can potentially reduce your investment risk and increase your chances of meeting your investment goals by strategically dividing your money among each of the major asset classes based on your financial goals, risk tolerance, and time horizon. This is called “asset allocation.” *

Here’s a quick look at three asset classes:

• Stocks have historically earned higher returns than other asset classes, but they carry higher levels of risk. Stocks are generally most suitable for long-term financial goals. There are different asset classes within stocks, including, but not limited to, foreign stocks, small-cap stocks, and large-cap stocks. 
• Bonds typically offer less return potential than stocks, but they may be less risky. Bonds may potentially offset some stock volatility in a long-term portfolio and also provide income for shorter-term needs. Types of bonds include Treasuries, corporates, and municipals.
• Money market instruments usually offer the lowest return potential and are the least risky of these three asset classes. They may be appropriate for short-term financial goals or emergency savings.

Generally speaking, your retirement plan or individual retirement account (IRA) should give you access to the above asset classes. You also may be able to invest in each type of the asset classes directly.

You should contact your financial professional to discuss your personal situation. This communication is not intended as investment and/or tax advice and should not be treated as such. Each individual's situation is different.