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.
Managing 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 plan or 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.
*Asset Allocation, which is a method of diversification that positions assets among major investment categories, does not guarantee a profit or protection against a loss.
Important Note: Equitable believes that education is a key step toward addressing your financial goals, and this discussion serves simply as an informational and educational resource. It does not constitute investment advice, nor does it make a direct or indirect recommendation of any particular product or of the appropriateness of any particular investment-related option. Your unique needs, goals and circumstances require the individualized attention of your financial professional. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues.
Small cap stocks, which represent smaller companies, involve specific risks given the typically higher failure risk of smaller companies. Large cap stocks may involve the risk that larger more established companies may be unable to respond quickly to new competitive challenges. Foreign securities involve special additional risks, including, but not limited to, currency risk, political risk, and risk associated with varying accounting standards.
Equitable Financial Life Insurance Company (New York, NY) issues life insurance and annuity products. Securities offered through Equitable Advisors, LLC, member FINRA, SIPC (Equitable Financial Advisors in MI & TN). Equitable Financial Life Insurance Company and Equitable Advisors are affiliated and do not provide tax or legal advice.