Is Your Portfolio Aligned with Your Needs?
When you invest, you make choices about what to do with your financial assets. Risk is often just thought of as the possibility that a negative financial outcome might occur. But there is also upside risk – the possibility of a higher return for riskier investments.
Stocks, bonds, mutual funds, and exchange-traded funds (ETFs) can have positive or negative fluctuations in value as the market changes. All investments carry some degree of risk and it is important to understand how your goals align with the amount of risk in your portfolio.
There are different kinds of risk to be aware of:
- Market risk is the most known risk associated with investments. This is when your investment value might rise or fall because of market conditions. Market risks include equity risk, interest rate risk, currency risk, and commodity risk.
- If you own stock in corporations or businesses, you may also be vulnerable to business risk, in which corporate decisions, such as whether to expand into a new area of business or merge with another company, can affect the value of your investments.
- Even conservative, insured investments, such as certificates of deposit (CDs), come with inflation risk. This means that the investment may not earn enough over time to keep up with the rate of inflation.
- Less commonly known, but still prevalent in many investor’s portfolios, are political risk and currency risk. Many portfolios contain global asset allocation with companies that operate across different countries. The risk here occurs if you own an international investment, events within that country can affect your investment.
There are other types of risk secondary to individual investments:
- Liquidity risk refers to how easy or hard it is to cash out of an investment when you need.
- Concentration risk is associated with how many or how few investments you hold and can be explained by an old saying you may have heard before: “Don’t put all your eggs into one basket.” This means that the more money you put into a single stock, the greater risk you take.
While you cannot avoid some degree of risk in investing, there are some ways you can help mitigate your risk:
- Asset allocation is an investment strategy that includes different types of assets in your portfolio, such as stocks, bonds, real estate, or cash. By doing this, you are essentially avoiding “putting all your eggs into one basket.” Doing this increases the probability that some of your investments will yield positive returns, even if others lose value.
- Diversification emphasizes variety. When you spread your assets among various investments within a certain type of investment, such as different types of stocks, you are again avoiding “putting all your eggs into one basket.”
Understanding the different kinds of risk associated with investing, together with some well-known and commonly implemented strategies to help mitigate risk, you can put yourself in a better position to meet your financial goals.
How much risk is right for you?
Still not sure whether your portfolio is aligned with your needs? Get your complimentary portfolio risk analysis with the Riskalyze tool. It's easy!
The first step is to answer a 5-minute questionnaire to pinpoint your exact Risk Number, guiding the decision-making process. Next, your financial advisor will craft a portfolio that aligns with your personal preferences and priorities, allowing you to feel comfortable with your expected outcomes. Finally, your financial advisor will build a Retirement Map and continually review your progress to ensure you are on the right track.
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SOURCES:
https://www.investopedia.com/terms/r/risk.asp
https://www.investor.gov/introduction-investing/investing-basics/what-risk
https://www.finra.org/investors/learn-to-invest/key-investing-concepts/reality-investment-risk
https://www.riskalyze.com/alignment
Neither asset allocation nor diversification guarantee a profit or protect against a loss.