When you invest, you incur risk – there’s no avoiding it. But the concept of “risk” may be more broad-based than you realized. And by understanding the different types of investment risk and how these risks can be alleviated, you can improve your results as an investor by receiving personal investment management in Minnetonka
The most common perception of investment risk is simply the risk of losing money. When you invest in stocks and stock-based vehicles, such as mutual funds, there are no guarantees that your principal – your initial investment amount – will be preserved. Generally speaking, if you hold stocks or mutual funds over a period of years, and even decades, you can reduce the likelihood of sustaining losses that could send your investments’ value to zero. With prudent allocation, the value ofyour investments will rise over time.
It’s worth noting that, since the Great Depression, U.S. stocks have averaged 9.59% annual returns, according to Morningstar Direct, an investment research service. However, past performance can’t guarantee future results but with personal investment management in Minnetonka your portfolio will reflect a risk-adjusted strategy to weather through market turbulence and corrections.
At any rate, this type of risk is real, and it’s a factor to consider when making your investment decisions. But you can’t avoid all risk by avoiding stocks and putting your money into other types of investments. By seeking personal investment management in Minnetonka, a portfolio investment strategy will include bonds, for example. When you purchase a bond, you typically receive regular interest payments and you get back your initial investment when the bond matures, provided the issuer doesn’t default. But if interest rates rise and you want to sell your bond before it matures, you’ll have to offer it at a “discount,” because no one will pay the full price for your bond when they can buy new ones at a higher rate.
You can help manage this type of interest rate risk by owning a variety of bonds with different maturities. When interest rates are rising, you can reinvest your short-term bonds at the new, higher rates. And in a falling-rate environment, you can still benefit from your longer-term bonds, which typically pay higher interest rates.
You can also choose to invest in floating rate secured notes which generate increasing income as market interest rates rise with a corresponding rise in value of the underlying asset.
Risk Continued
Foreign or international investments also contain specific risks. When you purchase foreign stocks, you’ll find that fluctuations in the value of currencies relative to the U.S. dollar can affect your returns. Also, international investments may carry geo-political risk, since some foreign governments and political systems may change in ways that work against businesses in those countries. To contain these types of risk, you’ll want to maintain a prudent allocation of international holdings and diversify across regions. By consulting with a personal investment management firm in Minnetonka a prudent allocation of assets will provide the balance needed for a stable portfolio to help achieve your goals.
Ultimately, your most broad-based defense against all types of risk is to build a diversified portfolio containing U.S. stocks, international stocks, corporate bonds, mutual funds, government securities and other investments. Diversification works because it helps reduce the impact that market volatility can have on your portfolio if you only own one type of asset, such as domestic stocks. (However, diversification can’t guarantee profits or protect against all losses.) And you’ll also want your portfolio to reflect your individual tolerance for risk.
A consultation with a personal investment management firm in Minnetonka will establish a roadmap to prudently diversify your investments, and avoid single investment concentration within one asset class. An example would be diversifying within large cap stocks, thereby leading to higher risk than with broad based diversification between and within market sectors and industry groups.
By being aware of the different types of risk, and taking steps to hedge those risks, you can create a portfolio that offers the potential to help you achieve your important goals, such as a comfortable retirement. And by doing so, you’ll avoid the greatest risk of all: failure to invest at all for your future. A consultation with personal investment management advisor in Minnetonka can provide the peace of mind to move forward, confidently, with your investment plans.