Understanding Risk
by Chad L. Coe, CWS
Most people think of risk as a negative thing. For investors, “risk” simply refers to the volatility of your portfolio’s return over time. How well you’re able to tolerate that risk demonstrates your ability to sustain through turbulent times.
Many factors contribute to the current level of investor risk. Those people who understand the various factors are better able to manage their money and make smart investment decisions. By taking the current conditions into account and analyzing them in relation to your time horizon, investment goals, ability to withstand losses, and life experiences, you can manage your risk and not take chances when it comes to investment decisions.
Economic Risk: Whenever the economy experiences a downturn, many companies report lower profits, which directly affects investors. While some firms adjust to economic downturns quickly, others take longer to react. The more you’re able to wait out poor economic times, the better you’ll fare in the long run.
Inflation Risk: As prices increase due to inflation, it’s likely that your purchasing power will decrease, as will your returns from investments. If your investment growth fails to outpace inflation, you may wish to consider investing in growth-oriented alternatives, such as stocks, stock mutual funds, variable annuities, or other vehicles.
Interest Rate Risk: Fixed-income investments tend to be sensitive to interest rate changes. When interest rates rise, the value of these investments falls. However, the opposite is also true: when interest rates fall, existing bonds increase in value. Waiting out the undesirable times and diversifying your portfolio will help reduce this risk.
Typically, the greater the risk you take, the greater the reward you reap. The general rule of thumb is to opt for less risk when you need to meet short-term objectives, higher risk when your outlook is more long-term. Regardless of your approach, knowing the various risk factors present and your own tolerance level for risk will lead to greater investment returns.
To discover a suitable asset allocation strategy for your needs, contact Chad Coe, RFC. Chad is President of Coe Financial Group, Inc. in Deerfield, IL. Contact him at 847-444-9444 or chad@coefinancial.com.
Securities offered through First Allied Securities, Inc.
A Registered Broker/Dealer Member: FINRA/SIPC
